Pepco's Q1: Is the Core Brand Strong Enough to Carry the Whole Company?

The headline is a positive one. Pepco Group's first-quarter revenue climbed 4.3% to 1.4 billion euros. That's real growth on the top line. But the story behind the numbers tells a more complicated tale, one where the strength of one chain is simply masking the weakness of another.

The core Pepco brand is doing its job. Its like-for-like revenue rose by 3.3%, showing that the core customer base is still spending and that the brand's value proposition is holding up. That's the engine driving the group's overall sales figure higher.

The problem is the other half of the business. The smaller Dealz chain is in clear retreat, with its revenue seeing a 7.7% decline over the same period. That's not a minor stumble; it's a steep drop that's pulling the group's performance down. The fact that the group is planning to sell this struggling chain is a clear signal that management sees it as a drag, not a growth asset.

So, the overall revenue growth looks less impressive when you break it down. The headline number is being buoyed by a solid core brand, but it's also being propped up by a chain that's actively losing ground. For investors, the real question is whether the Pepco brand's growth can be sustained and scaled enough to carry the entire company, especially as the group prepares to exit the Dealz segment.

The Real Driver: Volume and Margin Quality

The numbers tell a clearer story once you look past the headline. The growth in the core Pepco brand isn't just about price; it's about volume. When you strip out the fast-moving consumer goods (FMCG) category, which the group is exiting, the brand's like-for-like revenue still climbed 4.2 percent. That's the real kick-the-tires test. It means people are buying more of Pepco's core products, not just shopping for lower prices on a few staples. Strong volume growth, especially in key markets like Poland and Iberia, shows the brand's value proposition is resonating.

This operational strength is translating directly to the bottom line. The group's gross margin improved by 360 basis points year-over-year to 49.4 percent. That's a significant jump, indicating the company is getting more efficient at its core business. It's not just selling more; it's selling more at a better profit. This margin expansion is a key sign of management's execution and pricing power.

The CEO noted this focus on price leadership continues to resonate with customers in a subdued macroeconomic environment. In other words, in a tough economy where people are watching pennies, Pepco's strategy of being the low-price destination is working. Customers are trading up to the brand for better value, which drives volume and supports the margin improvement. It's a virtuous cycle: strong volume justifies operational efficiency, which funds further price competitiveness.

The bottom line is that the growth is built on solid ground. It's not a mirage created by temporary promotions or accounting tricks. The combination of volume-driven sales and improved margins suggests the core Pepco brand has real utility and brand loyalty. That's the kind of foundation that can carry a company, especially when paired with a clear plan to exit a struggling segment.

The Path Forward: Buybacks and the Dealz Exit

Management is clearly executing a disciplined plan to sharpen the company's focus. The most immediate signal to shareholders is the ongoing share buyback program. The second tranche of 50 million euros is set to conclude this week, a tangible use of cash to return value. This follows a strong year where the group generated significant free cash flow, allowing for a 55% growth in the dividend and a prior €50 million share repurchase. The market will be watching to see if the third tranche, up to 50 million euros, is initiated as planned later this year. This capital allocation is straightforward: buy back stock when the company believes its own shares are undervalued.

This buyback activity is part of a broader strategic refocus. The group is systematically exiting non-core areas to concentrate on the Pepco brand. The planned exit from the fast-moving consumer goods (FMCG) category and the divestment of the Dealz brand are not minor adjustments; they are the core of the turnaround. The goal is to simplify the business, cut through operational complexity, and funnel all resources into the one brand that is still growing. The CEO's comment that the strategy is validated by strong results suggests this move is working, but the proof is in the pudding of sustained growth after these changes are complete.

The success of this entire setup now hinges entirely on the Pepco brand. The company is betting its future on that core engine continuing to drive volume and margin expansion. The recent Q1 numbers show it can, with like-for-like revenue growth of 4.2 percent when excluding FMCG. But the coming quarters will be the real test. With the FMCG drag gone and the Dealz segment on the way out, the group's full-year guidance will be a pure read on Pepco's standalone health. If the brand can maintain its momentum, the capital return strategy will look brilliant. If it falters, the company's path will become much narrower and more vulnerable. For now, the plan is clear, but the execution is the only thing that matters.

Catalysts and Risks to Watch

The setup is clear, but the next few quarters will be a real-world test of the company's new model. The key near-term catalyst is the progress of the Dealz divestment. Management has stated the process is expected to commence in 2026, and its successful completion will finally simplify the business. With the FMCG exit already done and Dealz on the way out, the group's full-year results will be a pure read on the Pepco brand's standalone health. Any delay or complications in the sale could introduce uncertainty and distract from the core narrative.

The major risk is whether the Pepco brand's growth can fully offset the loss of Dealz's revenue and any lingering integration costs from the FMCG exit. The Q1 numbers show the core brand is strong, with like-for-like revenue growth of 4.2 percent when excluding FMCG. But that growth needs to be sustained and scaled to fill the gap left by the divestment. The group's guidance assumes a two percentage point adverse impact from the FMCG exit on revenue, which is already baked in. The real question is if Pepco's volume and margin expansion can not only cover that but also make up for the 7.7% decline seen at Dealz. If the core brand's momentum slows, the company's path will become much narrower.

For investors, the most important thing to watch is the durability of the 'price leadership' strategy. The CEO says it's resonating with customers in a subdued macroeconomic environment. That's a good sign, but it's also a strategy that lives or dies on margins and customer loyalty. Watch for any signs that aggressive pricing is starting to erode the 360 basis point gross margin improvement the company just achieved. Also, look for shifts in customer traffic or basket size that could indicate the brand's appeal is waning. The bottom line is that the current thesis hinges on the Pepco brand being not just strong, but strong enough to carry the whole company on its own. The coming quarters will tell us if that's a reasonable bet.