In the midst of the interim reporting season when the majority of the companies were publishing their interim financial statements ahead of the deadline of August 31, PG plc issued its annual report for the financial year ended April 30.
During the 2018/2019 financial year, the company’s flagship Zara and Zara Home store located in Sliema was closed for extension and complete refurbishment from July to November 2018 and therefore the financial results published last week are not directly comparable with the previous year’s figures.
Notwithstanding the closure of the Zara and Zara Home store in Sliema, PG reported a 6.7 per cent increase in revenues to a record level of just under €108 million as the ‘supermarkets & associated retail operations’ segment generated a 9.6 per cent growth in revenues to €92.9 million (FY2017/2018: €84.8 million). Meanwhile, revenues from the ‘franchise operations’ segment contracted by 8.3 per cent to €15.1 million (FY2017/18: €16.5 million) due to the five-month period during which the Zara Sliema store was closed.
Cost of sales increased by 6.5 per cent resulting in a gross profit of €16.4 million which represents a growth of 7.3 per cent over the previous year. The gross profit margin improved minimally from 15.1 per cent to 15.2 per cent but this needs to be seen in the light of the different revenue mix between supermarket operations and franchise operations since the Zara franchise operations generally command a higher margin to the supermarket business. In fact, the company highlighted that the improved margin came about from higher sales volume within the supermarket business and improved stock control.
PG generated an operating profit of €12.6 million during the 12-month period to April 30 representing a growth of 7.8 per cent from the previous year and an operating profit margin of 11.7 per cent compared to 11.5 per cent in FY2017/2018 despite the temporary closure of the Zara and Zara Home Sliema store. The segmental information included in the annual report provides an interesting analysis of the revenue and operating profit contribution of both segments in which the group operates.
During the 2017/2018 financial year, which was the first year when all three operating assets were fully operational for a 12-month period, the Zara franchised operations accounted for 16.3 per cent of revenues but nearly 26 per cent of group operating profit showing the improved margins compared to the supermarket business. In fact, in 2017/2018, the operating profit margin of the franchised business was of 18.2 per cent compared to 10.3 per cent for the PAVI and PAMA shopping villages.
Meanwhile, in view of the closure of the Zara and Zara Home Sliema store for a large part of the 2018/19 financial year, the contribution from each of the operating assets differed substantially from previous years. In fact, the Zara franchised business accounted for 14 per cent of revenue and 12.2 per cent of operating profits in the 12-month period to April 30 compared to almost 26 per cent the previous year. The operating profit of the franchised business shrank from €3 million in 2017/2018 to €1.5 million during the past financial year with the operating profit margin declining to 10.2 per cent from 18.2 per cent the previous year.
This was due to the lower revenues generated as a result of the closure of the flagship store in Sliema, the additional costs of circa €0.6 million incurred during the closure period and also as a result of the major discounted sale period in the flagship store in Sliema in June 2018 in order to dispose of the maximum amount of stock prior to the shop’s temporary closure in early July.
Meanwhile, the segmental information also provides an interesting insight into the improved performance of the supermarkets business. The operating profit generated by PAVI and PAMA grew by 27 per cent to €11.1 million both as a result of the increased revenues but also due to the improved margins which rose from 10.3 per cent in the 2017/18 financial year to 11.9 per cent.
Essentially, the very strong growth experienced by both the PAMA shopping village and the PAVI supermarket is what helped PG report a record financial performance in the last financial year despite the closure of the important flagship store in Sliema.
PG generated pre-tax profits of just under €12 million representing an increase of 8.2 per cent over the previous year. In previous meetings held with the company, Chairman John Zarb had explained that in view of the temporary closure of the flagship store in Sliema for a significant part of the last financial year, the company’s aim was to maintain an overall stable level of profits between the 2017/2018 financial year and the financial year to April 30. As such, the performance during the last financial year exceeded the company’s expectations.
An important metric when analysing equity investments is the return on equity
The upward momentum in the supermarket business continued during the start of the current financial year to April 30, 2020. In fact, during a meeting with financial analysts held on August 30 and also in the 2018/2019 annual report, it is stated that during the first quarter of the new financial year (i.e between May and July 2019), sales increased by seven per cent within the supermarket category. It was also reported that the growth within the PAVI supermarket is currently exceeding that of PAMA following the staged refurbishment programme carried out which is nearing completion.
With respect to the Zara and Zara Home store in Sliema, PG had indicated in the past that following the extension of the flagship outlet which increased the retail area from 1,711 square metres to 3,311 square metres, it was assumed that a 30 per cent growth in revenue would be registered.
During last week’s meeting, it was announced that following the reopening of the Sliema store, sales jumped by 39 per cent during the eight-month period between November 28, 2018 and July 31, 2019.
It is also worth highlighting that the Zara and Zara Home franchise operations (incorporating the Sliema flagship store and the additional Zara Home stores in PAMA and PAVI) had generated overall revenue of €16.5 million during the 2017/2018 financial year when all three outlets were operational for a full twelve-month period. As such, one would need to factor in the strong growth of the main contributor to the franchise business to determine the extent of the overall impact to the group financial performance for the current financial year to April 30, 2020.
The increased contribution from the Sliema store is the key determining factor to PG’s financial performance and dividend distribution for the current financial. Total net dividends for the 2018/2019 financial year amounted to €0.0417 per share (equivalent to €4.5m) representing a 5.8 per cent increase over the previous year and a dividend payout ratio of 50.4 per cent which is in line with the indicated dividend policy at the time of the IPO of a minimum dividend distribution of 50 per cent. A net interim dividend of €0.0157 per share was distributed in December 2018 and a second net interim dividend of €0.0259 per share was distributed in July 2019 in line with the company policy to distribute 40 per cent of the overall dividend as a first interim dividend in December and the balance of 60 per cent after the financial year-end.
Although PG have not published financial forecasts for the current financial year to April 30, 2020, the company disclosed that it will suffer an impact of circa €700,000 from the implementation of IFRS 16 due to the lease of the PAMA shopping village for the remaining period of 27 years. Meanwhile, the company will benefit from the increased contribution from the franchised business as a result of the flagship store in Sliema being operational for a full 12-month period.
Following the major upgrade at PAVI and the significant investment in the flagship store in Sliema, chairman John Zarb explains in the annual report that the group is well poised for further growth and is actively pursuing potential opportunities. During last week’s meeting, Mr Zarb explained that PG’s expansion could be pursued in a number of ways, namely, the expansion of existing sites, the acquisition and development of new sites, the acquisition of existing businesses or the development of the investment property acquired last year.
With respect to the expansion of existing sites, the chairman explained that the company lodged an application with the Planning Authority on a possible development but this is still in the very early stages. Meanwhile, the complete settlement of the purchase of the ex-pasta factory in Qormi will be finalised by 2020 via the company’s cashflow and the company applied with the Planning Authority to determine the permitted footprint and volume but no immediate development plans are envisaged except for excavation works.
An important metric when analysing equity investments is the return on equity. The record financial performance during 2018/2019 helped PG sustain a high ROE of 24.7 per cent which should be very comforting for the company’s shareholders. PG’s shareholders should also be very pleased at the total returns generated since the IPO just over two years ago given the strong share price appreciation coupled with the regular dividends distributed. Investors need to fully appreciate the long-term benefits of investing across the equity market and the track record of PG since its IPO is a clear testimony to this.
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