European discount retail group and Poundland owner Pepco Group posted “record” revenues last year, but shares have fallen back on a sharp drop in profitability and a slowing of sales.

The retail group’s revenues in the year to 30 September were up 17.7% on a constant currency basis to €5.65bn. The growth was primarily driven by the Pepco brand, which was up 24.8%, while its UK-based Poundland brand’s growth stood at 8.4%.

Overall sales performance was supported by the opening of 668 net new stores (826 store openings and 158 store closures). Pepco opened 556 net new stores during the 2023 financial year, while Poundland opened 53 stores during the year and closed 51 underperforming stores.

However, the group’s bottom-line performance was less stellar. Underlying pre-tax profit of €202m was down 33.7% at constant currency, reflecting investment in stores, expansion and related supply chain costs, alongside higher inflation and higher interest costs. Underlying EBITDA of €753m was up 3.1%.

Given the sliding profitability, the group vowed to take a “more disciplined approach to growth”. The current financial year is expected see 400 net new store openings, and Pepco said openings would now focus on existing markets.

Pepco insisted it saw strong potential in the UK discount space, which is forecast to grow quicker than Germany and France. To take advantage of this growth, it will accelerate the opening of new Poundland stores and selectively refresh its existing estate to deliver an “enhanced customer experience”.

In September 2023, Poundland agreed to take control of up to 71 Wilko store leases in the UK. By early mid-December 2023, 64 former Wilko stores had already been reopened as Poundland stores, with 10 stores opening in the 2023 financial year and the balance at the start of 2024.

Despite the positive UK outlook, group performance since year-end has been “mixed”. Overall, the group saw like-for-like revenues decline by 3.1% in the eight weeks to 26 November 2023, against a strong trading period in the prior year. However, it is seeing sequential improvements week on week.

The group expects more challenging trading conditions in its 2024 financial year, but remains “cautiously optimistic” about trading prospects.

Sophie Mitchell, retail analyst at GlobalData, said Pepco’s results were “robust” against strong comparatives, “delivering growth as the tough economic backdrop faced by consumers aided its position as a value retailer”.

She also noted that Poundland had also managed to keep pace with rival B&M, as their sales growth positions almost equalised after a slightly weaker Q2 for B&M. Meanwhile, its opening of 64 Wilko stores under the Poundland fascia could allow it to gain more market share in the value retail market.

“However, it will be interesting to see how its online channel, which was relaunched as a transactional website in September, fares over the next year,” she added. “Despite making the Poundland offer more accessible geographically, there is a minimum £20 spend on Poundland.co.uk, at which point delivery is a punchy £5.95, making it an expensive way to shop for value products.”

Pepco Group shares were down 2.5% on the release of its results back to PLN23.80, but it had reversed that loss after share price growth on Thursday.

The shares are, however, down 39% year to date despite a rebound in recent weeks that saw its shares rise from PLN17.05 at the start of November to PLN24.50 on Thursday.

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