• Experienced 29.2% year-over-year contraction in sales volumes due to government-mandated pricing policies
• Company demonstrated operational agility, remains competitive amidst decline in customer traffic and rising costs
• Transition to ZiG currency expected to provide some relief, but black-market exchange rate poses ongoing challenges

Harare- The macroeconomic headwinds arising from the government's implementation of price controls have dented the sales performance of OK Zimbabwe, the country's leading retail gem. However, the company has demonstrated resilience in maintaining profitability amidst these challenging operating conditions.

OK Zimbabwe experienced a 29.2% year-over-year contraction in sales volumes during the full fiscal year 2024. This sales deterioration was catalyzed by the government's directive mandating formal retailers to utilize the official exchange rate for product pricing, which was significantly undervalued compared to the parallel market rate determined by market forces.

In an 80% dollarized economy, this pricing distortion rendered OK's merchandise uncompetitive in US dollar terms, driving consumers to seek out more affordable options in the informal "tuck-shop" segment.

This government intervention, ostensibly intended to prop up the Zimbabwean dollar, inadvertently empowered the informal retail sector at the expense of the tax-compliant, institutionalized players.

Peer entities such as Meikles' TM Pick n Pay also experienced sales declines, albeit to a lesser degree of 4.8%. The contagion has even permeated the apparel sector, with Truworths struggling to maintain business continuity.

On average, OK Zimbabwe's customer traffic has declined by 10%, from 120,000 to the range of 100,000-110,000 patrons. Nonetheless, the group maintains a robust physical footprint, operating 72 stores as of October 2023, including 9 OK Mart outlets, 9 Bon Marche shops, and 3 Food Lovers stores. The flagship OK brand accounts for 60% of the company's revenues, followed by OK Mart (25%), Bon Marche (13%), and Food Lovers (2%).

The impending transition to the ZiG currency is expected to provide some relief, as the formal exchange rate has historically been more stable on the formal market.

However, the black-market rate is currently hovering in the range of ZiG19-ZiG21 per US dollar, rendering products from formal retailers slightly more expensive in US dollar terms, though considerably cheaper in the local currency vis-à-vis the informal sector.

This dynamic is expected to result in robust ZiG-denominated sales, albeit with a muted US dollar performance.

Fortunately, the government has assured the availability of foreign currency to facilitate stock replenishment and meet external obligations, which should enable OK Zimbabwe to navigate this transition successfully.

Currently, the company's US dollar revenue contribution has decreased to only 20% of the total.

To offset the decline in sales volumes, OK Zimbabwe needs to focus more on optimizing its cost structure, streamlining operations, and enhancing efficiency.

Given the prevailing foreign currency constraints, it would be prudent for the government to allow local operators to retain a larger portion of their foreign exchange earnings, perhaps by reducing the current surrender requirement from the current high levels.

The highly informalized nature of the Zimbabwean economy has also led to a substantial tax revenue leakage, as many of the informal players evade their fiscal obligations.

In this context, it may be beneficial for large-scale retailers like OK Zimbabwe to be granted the flexibility to offer a 10% pricing option in USD, allowing customers to transact in both US dollars and ZiG at competitive prices, thereby enhancing convenience and competitiveness.

Financial Perfomance

Despite the challenging macroeconomic environment, OK Zimbabwe's financial performance during the full year 2024 demonstrated resilience. The group reported a profitability of ZWL931 billion, supported by a 29.4% year-over-year increase in revenue to ZWL12.4 trillion (from ZWL9.5 trillion in the previous year) and a significant 330% surge in operating income to ZWL2 trillion (from ZWL468.7 billion).

However, the group's earnings were weighed down by a 107% escalation in operating costs, which surged from ZWL1.67 trillion to ZWL3.44 trillion, driven by substantial increases in energy costs, utilities, and property-related expenses.

Utilities providers, such as ZESA and local municipal authorities, implemented unsustainable tariff hikes for electricity, water, and rates, further exacerbating the cost of doing business. Additionally, the erratic power supply necessitated a greater reliance on generators, which drove energy costs to record highs.

Moving forward, OK Zimbabwe remains committed to implementing volume recovery strategies and is optimistic about achieving top-line growth in the coming fiscal year, despite the macroeconomic uncertainties.

Equity Axis News