Pepco Group's Bold Transformation: A Value Investor's Dream

Investors, listen up! The New Pepco Group (PCO.WA) is undergoing a dramatic transformation that's primed to unlock massive value. By simplifying its business structure, expanding into high-growth regions, and aggressively improving margins, this retailer is setting itself up for a comeback. Let's break down why now could be the time to buy—before the crowd catches on.

The Power of Structural Simplification

Pepco's decision to exit the FMCG (Fast-Moving Consumer Goods) category by the end of FY2025 is a masterstroke. FMCG was dragging down margins, and the company has now focused its energy on higher-margin categories like clothing, general merchandise, and fresh food. The results? In Q3 FY2025, Pepco's like-for-like (LFL) sales grew 4.8% when excluding FMCG, compared to just 2.4% overall. This move isn't just about cutting losses—it's about rebuilding Pepco around what works.

Margin Expansion: The Quiet Catalyst

Margins are the lifeblood of any retailer, and Pepco is finally getting serious about them. In Q3, gross margins jumped 180 basis points year-on-year, driven by better inventory management, sharper pricing on top sellers, and a leaner product range. The exit from FMCG isn't the only factor—Pepco's Eastern European expansion is also paying off. Stores in Poland, Hungary, and Romania are outperforming, leveraging lower labor costs and government incentives. This isn't just a temporary boost; it's a sustainable margin story.

Eastern Europe: The Next Big Growth Engine

The company isn't just simplifying—it's expanding aggressively where the growth is. In Q3, Pepco opened 45 net new stores, mostly in Central and Eastern Europe (CEE), bringing total stores to 4,276. The goal? 250 new stores in FY2025 alone, with a focus on markets like Poland and Hungary, where real estate costs are low, and demand for discount retailers is soaring. CEE's proximity to EU markets means faster delivery times and lower logistics costs, giving Pepco a supply chain edge.

Share Buyback: Betting on Its Own Future

When a company returns capital to shareholders, it's a clear sign of confidence. Pepco's announced a €50 million share buyback program, with plans to spend up to €200 million over three years. Why now? Management believes the stock is deeply undervalued, trading at a P/E of -3.13 due to temporary losses from the soon-to-be-sold Poundland division. Once that drag is gone, earnings could snap back sharply. The buyback isn't just about rewarding shareholders—it's a bold vote of confidence in the company's turnaround.

Why the Market Misses the Boat

The skeptics will point to Pepco's negative P/E and a weak Poundland division. But here's the truth: Poundland is being sold, and its operational issues are well-known. The “New Pepco Group” (Pepco and Dealz Poland) already delivered 7.7% constant currency revenue growth in Q3, with Dealz's food and GM categories surging 5.8% LFL. Meanwhile, the market hasn't yet priced in the margin upside from exiting FMCG or the long-term growth of CEE.

The Bottom Line: Buy Now, Before the Surge

Pepco is a classic value play: a beaten-down stock with a clear path to profitability. With margins expanding, stores booming in high-growth regions, and a buyback program in motion, this stock has asymmetric upside. The risks? Sure, economic headwinds or execution stumbles could delay the rebound. But at current levels, the reward far outweighs the risk.

Action to Take: Buy shares of Pepco Group (PCO.WA) now. Set a target of €12–€15 per share over the next 12–18 months as margins improve and the buyback kicks in. This is a transformative story—don't miss it!

Invest smart,
The Mad Capper