Pepco Group Announces Record Q1 Revenues

Pepco Group, the fast-growing variety discount retailer, which owns the Pepco and Dealz brands in Europe and Poundland in the UK, today reports a trading update for its first financial quarter of FY24 ending 31 December 2023.

SUMMARY

• Record Q1 Group revenues of €1.9 billion with constant currency revenue growth of +11% versus last year

• Group like-for-like (LFL) revenues declined 2.3% in Q1, but with an improving trend during the quarter 
o Pepco LFL revenue declined 3.7% against a tough comparative period where LFL sales were up by +20% in Q1 FY23

o Poundland LFL grew by +0.9%, with a strong peak Christmas performance driven by demand for FMCG, offset by a weaker performance in clothing 

o Dealz LFL declined by 4.6% driven by planned lower stock availability in general merchandise (GM) categories ahead of a transition to Pepco-sourced GM 

• Recovery in Group gross margin underway with a 200 basis point improvement year-on-year in Q1 FY24, driven by Pepco

• Store opening schedule front-end loaded to benefit from the peak trading period, with over 200 net new stores opened across the Group in the first quarter, including a one-off benefit from Wilko conversions in the UK

Commenting on the results, Andy Bond, Executive Chair of Pepco Group, said: “The Group delivered record revenue in its first quarter. Whilst the Pepco brand saw LFL revenues down across the quarter against a tough comparative period last year, it was encouraging to see the LFL trend improve over the three months in its core CEE markets. Poundland continued to perform robustly in Q1, boosted by strong sales of FMCG.

“I am pleased that we achieved a 200 basis point year-on-year improvement in gross margin during Q1, and this positive trajectory is expected to continue over FY24 - notwithstanding the potential impact of external factors beyond our control, such as industry-wide supply chain disruption. “We are making good progress against our renewed strategy, as outlined in October last year, to improve profitability and cash generation in our core established business, while delivering more measured profitable growth. We are acting decisively at pace – we have initiated a more targeted store opening programme, paused the new look refit programme, and stopped activities that will not produce appropriate returns.

“Looking ahead, the Group has a market-leading customer proposition, strict focus on returns, and proven profitable store model that makes the leadership team confident in delivering future success across our core European markets.” 

HIGHLIGHTS

The Group opened 203 net new stores during the first quarter, with our store opening schedule for the year being front-end loaded in order to take advantage of our peak trading period. This also includes a one-off benefit of 54 Wilko conversions for Poundland. As a result, we expect the run rate of store openings to moderate over the coming quarters and expect to open at least 400 net new stores in FY24, excluding the one-off Wilko conversions in the UK. 

• Pepco: 127 net new store openings during the first quarter. This net store growth was driven by CEE with over 70% of openings within the region, including 39 net new store openings in Poland. 

• Poundland: 77 gross new store openings during the first quarter, largely reflecting 54 Wilko conversions during the period. 

• Dealz Poland opened 26 new stores in the period, and now operates 309 stores in total across Poland.   

OUTLOOK 

Across much of Europe, trading conditions continue to be challenging, but we remain cautiously optimistic for 2024. Despite Group LFL revenue declining by 2.3% in the first quarter, albeit against a strong comparative period, we saw an improving LFL performance trend across the quarter. 

A 200 basis point improvement in Q1 Group gross margin was delivered year-on-year, driven by a strong recovery in our Pepco business. This also represents a tangible increase in gross margin compared to the final quarter of FY23. We expect this momentum in gross margin to continue as the year progresses with the business benefiting from easing input costs, including commodity and freight, an improvement in FX, and buying margin improvements.   

While we continue to have line-of-sight on potential further gross margin improvements over the coming quarters, we note that the current situation in the Red Sea is leading to elevated spot freight rates and delays to container lead times. The majority of our freight costs are contracted until the end of Q3, but the business is facing additional surcharges from carriers in relation to the longer shipping routes being taken. While there is limited impact on product availability currently, a prolonged issue in the region could also impact supply in the coming months. 

Outside of these external factors, management continues to focus on what remains within its control, leveraging the opportunity to grow in our existing core markets in a more targeted and measured way, which is already leading to benefits, including a strong level of free cash flow generation during the first quarter.   

We will keep a strict focus on returns as we grow the business, while maintaining a robust balance sheet in order to execute on our strategy. This foundation, alongside strong brand equity and market share in our core CEE market and a proven profitable store model, gives us continuing confidence in the opportunity of building Europe’s leading variety discount retailer. 

Source : Pepco Group

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