Predatory pricing trend hits Italtile

Italtile reported weak results for the year through June 2024, with flat turnover and a decline in profit and earnings.

Italtile released its results for the year ended 30 June 2024 on Monday, which revealed poor results for the retailer.

Total turnover remained flat for the period at R11.54 billion compared to R11.50 the year prior. This saw revenue also stay mostly flat, declining by 1% to R9.06 billion.

Trading profit was down 11% to R2.01 billion compared to R2.32 billion the previous year. Profit for the period fell by 9%, down from R1.66 billion to R1.51 billion.

Earnings per share declined by 8% to 122.1 cents per share, down from 132.6 the year prior.

Italtile also closed stores during the period, decreasing its store network from 216 stores to 208.

However, the sale of some properties boosted the retailer’s cash and cash equivalents by R76 million, bringing its cash balance at the end of the year to R1.84 billion.

This marks a 76% increase in the retailer’s cash balance compared to 2023.

In light of this strong cash generation and cash reserves being in excess of operational requirements, Italtile’s board declared a special cash dividend of 78 cents per share.

Despite this, Italtile explained that trading conditions in South Africa remain difficult.

“At the macro-level, sluggish economic growth and difficult trading conditions persisted in the year ended 30 June 2024,” the retailer said.

“Homeowner confidence remained subdued in light of sustained high interest rates and inflation.” 

“Country-specific risks, including load-shedding, uncertainty regarding the outcome of the elections, and poor service delivery and governance also deterred investment in the home improvement segment, which was evidenced by weak demand in the market.” 

Italtile explained that, in the context of low GDP growth and weak consumer sentiment and spending, the building cycle downturn has yet to recover.

The retailer also pointed out how the industry and competitive landscape underwent a significant change in the past few years, as Southern African tile manufacturing production capacity now far exceeds demand. 

“This over-supply has resulted from an increase in capacity by other competitors in South Africa and the recent establishment or expansion of capacity by factories in Zambia, Zimbabwe, Mozambique and Tanzania,” the retailer said. 

“Weak demand over several years had already caused high levels of inventory in the local market, and the additional new supply has aggravated this situation.” 

“As a result, SADC manufacturers are resorting to predatory pricing in South Africa in a bid to penetrate the market.” 

Italtile explained that, in turn, this has intensified rivalry among retailers competing for market share in a sector where prices have persistently declined over the year.

It further said that this deflationary pricing has had a severe impact on margins across the industry. 

“It is likely that these unsustainable margins will result in consolidation among players and rationalisation of capacity in the market in due course,” the retailer said.

However, Italtile also pointed out some green shoots appearing in South Africa’s economy, including the cessation of load-shedding, substantial cuts in fuel prices, a notable decline in food inflation, and an improvement in confidence levels. 

“Subsequent to the election, the configuration of the government of national unity, which is broadly recognised as investor-friendly, has also had a positive impact on the financial markets and local currency,” the company said.

“These constructive developments, while welcome, will take time to filter through to disposable income and investment sentiment.” 

“A sustained downward trajectory in inflation and interest rates will be required to afford significant stimulus to our industry.”

In addition to its special dividend, Italtile declared an ordinary dividend of 49 cents per share, down slightly from the one it declared in 2023. This brings Italtile’s total dividend to 127 cents per share.