Discount retailer Pepco forecasts 'challenges' into 2024

By James Davey

LONDON (Reuters) - European discounter Pepco Group cautioned on Tuesday that "short-term sales challenges" would continue into 2024 for retailers, although the profit margin outlook was improving.

The Warsaw-listed owner of the Pepco, Poundland and Dealz brands, which warned on the outlook twice in September, reported a 3.1% rise in core earnings for the year ending Sept. 30, in line with its latest guidance.

However, trading in its new financial year had been mixed, with like-for-like revenue down 3.1% in the period to Nov. 26.

Shares in Pepco, which did not issue new earnings guidance, were down 6%, extending their losses for 2023 to 42%.

It said the macro and consumer backdrop was particularly challenging in Central and Eastern Europe where customers remained cautious on discretionary spending and sales were slightly lower than anticipated.

In the UK, Poundland's like-for-like sales were slightly above the same period last year, reflecting a strong performance in consumer packaged goods and a weaker performance in clothing.

Executive Chairman Andy Bond, however, said he was "cautiously encouraged" by recent third-party data pointing to an expected easing of some pressures on household budgets, particularly in Central and Eastern Europe.

"We also continue to expect gross margin recovery throughout the year, and are already seeing encouraging signs here," Bond said, noting easing commodity and freight costs.

Pepco reported underlying EBITDA of 753 million euros ($811 million) in 2022/23, on revenue of 5.65 billion euros, up 17.7% on a constant currency basis, as it opened a net 668 new stores, taking the total to 4,629 at the end of the period.

As previously flagged, Pepco said the profit outcome reflected weaker than expected fourth-quarter sales, a lower gross margin as it shifted older stock, higher costs, and the drag from investment in new stores.

In October, Pepco said it would slow down its store opening programme to focus on rebuilding profitability. It also committed to the UK as its largest market.

But it still plans to open at least 400 net new stores in 2023/24 and is stepping-up Poundland's expansion.

($1 = 0.9285 euros)

(Reporting by James Davey; Editing by Shri Navaratnam, Kim Coghill and Alexander Smith)