On December 19, PG plc published its interim financial statements for the six-month period between May 1 and October 31, 2018. Despite the closure of the Zara store in Sliema for most of the period under review, overall revenue of the PG Group grew by five per cent to €51.2 million.
The turnover from the Zara and Zara Home franchise operations decreased by 35 per cent to €4.9 million mainly due to the closure of the main outlet in Sliema in view of the expansion and refurbishment project. In fact, normal operations at the Sliema outlet were effectively brought to a close in mid-June and the store closed completely in mid-July following an extensive sale to dispose of all clothing stock. As such, the Zara store in Sliema was open for only six weeks.
On the other hand, PG registered a growth of 12.4 per cent in revenue from the supermarkets and associated retail operations to €46.3 million. This increase was achieved as the Pama Shopping Village continued to grow in popularity while encouraging levels of growth were also being registered at the Pavi Shopping Complex in response to the ongoing refurbishment programme. The improved performance of both the Pama and Pavi shopping villages also led to a corresponding increase in the rental income from third-party tenants within the shopping villages.
PG convened a meeting for financial analysts shortly after the publication of the interim financial statements. PG’s chairman, John Zarb, gave a detailed overview of the financial results and the overall operations over recent months.
Zarb indicated that the Pama shopping village registered a 15 per cent growth in the overall level of sales while an increase of eight per cent was seen from the Pavi shopping village but this growth rate was accelerating after the end of the financial period on October 31 as a result of the benefits from the refurbishment programme which augurs well for the group’s financial performance in the second half of the year.
PG’s operating profits in the six months to October 31 were marginally unchanged at €5.8 million, representing an operating profit margin of 11.3 per cent. The chairman remarked about the encouraging profit margins with added efficiencies at the supermarkets offsetting the impact of lower clothing sales on which a higher profit margin is normally earned. In fact, in the previous financial year which ended on April 30, 2018, the operating profit margin of the supermarkets amounted to 10.4 per cent, while the Zara franchise operations was 18.2 per cent. However, during the first half of the 2018/19 financial year, while the margin of the franchise operations declined to 12 per cent due to the effect of the refurbishment and the extensive sale ahead of the store closure, the supermarkets business improved its margin to 11.2 per cent.
Profits before tax were also largely unchanged at €5.5 million while, due to a lower tax expense, the profit after tax for the first six months of the year improved by 12.1 per cent to €4.1 million.
We are not prepared to invest at the expense of not distributing an adequate return
Zarb made reference to the last meeting with financial analysts at the end of August to discuss the April 30, 2018 annual financial statements wherein he had indicated that the group was expecting a weaker performance during the first half of the year with a recovery during the second half of the year as a result of the opening of the Zara store in Sliema. In fact, at the time, the chairman had also explained that PG had hoped to maintain an overall stable level of profits between the 2017/18 financial year and the current financial year to April 30, 2019.
However, during the meeting on December 19, PG’s chairman stated that given that the profits in the first half of the current financial year are higher than expected and the fact that the Zara store opened on time on November 28, the group is now more optimistic on achieving an improved financial performance compared to the pre-tax profits of €11.1 million in the previous financial year to April 30.
During the presentation to financial analysts, the chairman also shared the figures achieved during the first few weeks of the opening of the new Zara store. Zarb explained that between November 28 and December 16, overall revenue of the Zara franchise outlets totalled €1.91 million compared to €1.13 million during the same period last year representing an increase of 69 per cent. The chairman admitted that while this exceptional performance cannot be maintained throughout the year, the “early indications are that the performance may exceed our targets”. It was also revealed that PG had assumed that the Zara franchise business will register a 30 per cent growth in revenue as a result of the substantial increase in the size of the new store.
The Zara franchise operations had generated overall revenue of €16.5 million during the last financial year, so a 30 per cent growth would equate to overall revenue of almost €22 million during a full 12-month period. With revenue of €4.9 million from franchise retail operations in the first half of the year to October 30, and assuming €11 million in revenue between November 1 and April 30, 2019, the PG Group should manage to match last year’s revenue of €16.5 million despite the closure of the Zara store in Sliema for five months of the year. Should this be the case, it would be a remarkable achievement.
Although the commentary within the directors’ report published on December 19 made reference on two occasions to ‘new growth opportunities’, both the chairman as well as CEO Charles Borg claimed that there is nothing concrete as yet but the group is interested in pursuing new investments apart from the eventual redevelopment of the United Macaroni factory. The CEO admitted that as yet there is no site earmarked for a third shopping village but the group would eagerly evaluate such a proposition since it is their belief that PG needs a fourth operational asset in line with its long-term ambitions.
In the announcement and during the analyst meeting, no mention was made of the overall shareholder returns being generated. It is worth recalling that during the last financial year to April 30, 2018, the return on equity was of 24.9 per cent, while the annualised return on equity based on the interim financial statements published last week is of 24 per cent. This high return augurs well for shareholders given the financial performance in the second half of the financial year between November 1 and April 30 is always superior to the first six months due to the positive seasonality effect of both Christmas and Easter in the second half.
Since the IPO in early 2017, PG has already distributed three dividends to shareholders with the most recent being earlier this month representing the first interim dividend for the 2018/19 financial year. PG had stated its dividend policy in the IPO prospectus of a semi-annual distribution amounting to at least 50 per cent of annual profits after tax. This commitment was highlighted once again in a recent interview with PG’s CEO who stated that “we are not prepared to invest at the expense of not distributing an adequate return to our shareholders”.
In view of the sizeable impact of the Zara franchise operations on the overall business performance of the group, PG’s chairman indicated last week that an announcement will be made in March once the Zara store in Sliema would have been operational for three months. This ought to be an important update for the market since it will provide further clarification on the success of the new Zara store and whether the group will surpass the budgeted growth figure of 30 per cent from the franchise stores. Furthermore, it would be an important indicator for overall profitability this year and eventual dividend payments to shareholders.
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