Purple Group spends R7 for each R1 in extra revenue

Purple Group’s financial results for the six months ended 28 February 2023 revealed that its operating expenses increased significantly faster than its revenue.

The company first warned investors that they expected very poor results on Friday afternoon – a clear sign that they would have preferred to keep this news quiet.

On Monday, the full reality of Purple Group’s disastrous first six months of the financial year was shared with the market.

The standout figure was that the financial services provider made a net loss of R10.6 million over the reporting period, a huge negative swing from the previous net profit of R17.7 million.

It signals a 158% deterioration in Purple Group earnings compared to the previous half-year period’s net profit of 1.63 cents per share.

Purple Group CEO Charles Savage tried to talk up the results, saying, “The core value drivers of the Purple Group continue to perform very well, and we have more partners than ever before”.

Savage explained to investors that it is important to remember that the Purple Group business model is cyclical and affected by economic downturns.

However, Purple Group managed to increase revenue by almost 7%, which shows that cost management is its biggest problem. The numbers confirmed it.

Purple Group’s operating costs, including depreciation and amortization, increased by R64 million, while company revenue only increased by R9 million.

Therefore, the company’s incremental revenue increases were met by seven times higher operating expenses.

Simply put, it costs Purple Group around R7.00 in additional operating expenses for each R1.00 in extra revenue.

The market did not like what it heard from Purple Group, and the share price tanked by over 10% following the results.

Purple Group net income

The chart below shows Purple Group’s 6-monthly net income change over the last three years.