To market, to market to buy a fat pig. It was a case of the little steam engine making a comeback through the day, mostly as resource stocks rocked the joint, and had the pulling power to see us through to the most modest of gains for the day. A few points actually. But hey, check that one down for the bulls. The currency seemingly caught a bid and then the intraday graph heads South again. The timing of course coincided with precious metal prices spiking, and then resting back lower. Why? Because the steady Ben, no, no, Ben "the measured" Bernanke was testifying to a rather unknowledgeable crowd on capitol hill, Before the Joint Economic Committee, yesterday. Have a read through the speech.
I think that the key and critical parts are that the Fed are looking to end their asset buying program, but won’t until the unemployment picture improves dramatically. Check it out: "With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy." And the key rate, announced at the December meeting is a full percentage point lower than it is currently. 6.5 percent! And of course don't forget the dual mandate of inflation targeting, the fact that the programs and rates will remain here whilst inflation is benign. In the US, that is, not so much here, where we are pushing the top end of the range. At least we are still in that range. So I guess the takeaway is that whilst the Fed is large and in charge, the short term news flows are watched by all. And if better than anticipated, expect the Fed to slow their persistent presence that one has been accustomed to.
At the same as this prepared testimony, there was also the release of the Fed minutes, from the prior meeting. FOMC Minutes - April 30-May 1, 2013, take a look. The worries that tax burdens on folks and the sequester, what are those likely to reveal about the strength of the US economy, the FOMC are watching that. Clues. Oh yes, and the Fed pointed to large scale asset purchases by the Japanese as being proof that it worked when looking for economic recoveries. I guess that there are still many sceptics there, the Japanese market continues to defy all odds, at least over the last 6 months. The Nikkei 225 is up 65 percent since the BoJ decided to wander off on the inflation and growth path, seeing as the deflationary grips were too much. I wonder what a wealth effect could have on Japanese fertility rates, seriously. Surely if people feel richer, it might tip them over to having another child. And in Japan that comes with a whole host of benefits. But, the Japanese are still reluctant to have kids. Perhaps immigration reform is in order.
But Wall Street grappled with the Bernanke testimony and more so the Fed minutes, a slowing in Fed asset purchases at least in the mind of the masses is a bad thing. But those same folks want the Fed to end their stimulus, so which one is it? I go for the second one. If the Fed see the picture for employment improving, then the economy will take care of itself. The impact of the automatic spending cuts, those will be noticeable, but hey, I thought that is what people wanted too. They wanted less Fed, a recovering market and very definitely less government spending. And if that meant defense (the US defense spelling) spending is reduced, then perhaps that is a very good thing in the long run.
Markets slid through the session on Wall Street, the later Fed minutes compounded the thinking. The broader market S&P 500 reversed the session opening gains and sank over four fifths of a percent. Just this morning I would think that there is a little more cause for concern, at least in some quarters as a Chinese PMI read, the flash HSBC PMI one showed contraction in the manufacturing sector. Soft external demand remains, I guess that is no surprise. But local (i.e. internal China) demand is obviously not strong enough in order to offset the continued weakness from the rest of the world. Check it out from the horses mouth: China's recovery cools. So I guess when we get the full release in 11 odd days time, we should have a clearer picture. But I guess in the short term this will create some anxiety, as it always does. The Japanese are getting an absolute pasting this morning, selling off from the recent highs. I guess it has been all "go" for them lately. But 7 odd percent!!! Phew.
Byron beats the streets
Yesterday Mr Price released full year numbers for the period ending 30 March 2013 which came in at the middle of the range alluded to by the trading update released at the beginning of the month. This company sure has been an amazing performer. And they remind you of this in the report, why not?
"The Company has achieved a 27-year compound annual growth rate in HEPS of 23.5%, DPS of 25.3% and share price of 26.9%. The return on equity of 51.1% is the highest achieved to date."
This year was no laggard as the business managed to increase headline earnings per share by 26.3% to 635.5c. This came off the back of a 12.7% increase in sales and a gross margin increase of 0.4% to a healthy 42.2%. Same store sales came in at 7.7% while inflation increased by 5.1%. 77 stores were opened and 20 were expanded. Let's look at the divisions and then see why and how earnings growth comfortably beat sales growth.
The Apparel chains increased sales by 12.5%, comparable sales up 5.9% while earnings increased 14% thanks to margin expansion. Within this division Mr Price Sports grew sales 22.9% (comparable 11.9%) which is an exciting prospect for the group going forward. You already know my thesis on sports apparel and our recommendation on Holdsport.
The home chains increased sales by 15.2% with comparables up 10.8%. This again shows us that Ellerines are losing market share with their higher end brands such as Wetherlys. Margins grew very nicely in this division, up to 12.9% from 11.2% the year before. This was achieved in a weaker rand environment which means that the business has been able to comfortably pass on the cost increases to the client while remaining competitive.
So what has grown that bottom line so nicely? Trade receivables increased by 28.4% to R1.6bn. Their expansion into the credit market has done wonders for their earnings growth. However, and this is nice to hear as an investor, they are doing this very cautiously and have set a limit of at least 75% having to be cash sales. The current ratio is 80.4%. This makes me believe that every cash retailer should trade at a premium to one who relies on credit. This is because entering into the credit world can enhance earnings considerably over a short period of time. A business like Cashbuild comes to mind, who have the potential to enter the credit market more aggressively. I think a ratio of 75% cash, 25% credit sounds healthy.
Their outlook on the industry is interesting.
"In the short term there are some serious challenges facing consumers. Growth in consumer spending in South Africa is expected to become more subdued and less supportive of economic growth. "The current financial hardships are mainly being experienced by low-income households and it is a misconception that these represent the Group's core customers," said Bird. "As per the latest independent AMPS survey, our largest chain, Mr Price Apparel, has a strong representation of shoppers across the mid to upper LSM spectrum (LSM 6 to 10)." Under tight economic conditions, shoppers tend to shop for value and therefore, as a value retailer, the Group is well placed to attract more customers. The Group will continue its unwavering focus on its core competency - offering fashionable merchandise at everyday low prices."
This is a fantastically managed business and I think one of secrets behind their success is their buyers. These are people who work for Mr Price and go around the world finding the right goods to put into Mr Price stores. They always seem to get it right and that is why Mr Price have moved up the LSM line and are able to charge a premium. Their clients have happily absorbed the price increases and shareholders have happily reaped the benefits. I don't see this trend ending although maintaining this kind of growth in current conditions will be tough.
Crow's nest. We are following the Asian sell off in a big way, US futures got crushed and then stabilized much lower, we are red across the board. The gold price has at least found a good level, for the sake of the countries gold mines we need it a whole lot higher though!
Sasha Naryshkine and Byron Lotter
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