Poundland owner says Red Sea disruption limited for now

By James Davey

LONDON (Reuters) -Poundland owner Pepco Group can shelter customers from the disruptions to supply and costs caused by Iran-backed Yemeni Houthi militants in the Red Sea provided they do not drag on, its executive chairman said on Thursday.

"I don't think the experience for customers, in our stores at least, will be massively operationally disrupted," Andy Bond told Reuters in an interview after the group updated on Christmas trading.

"Our best forecast at the minute is we're able to absorb the incremental cost that we estimate will come through and still achieve ... gross margin improvement, (and) our price investment," he said.

If disruption continued for a long time, he said, without being specific, the company would need "a plan B".

Some shipping companies have diverted shipments, using the much longer and more costly route around Africa's Cape of Good Hope to avoid the attacks.

The group said the majority of its freight costs are contracted until the end of its third quarter, although the business could face additional surcharges from carriers because of the longer shipping routes.

"While there is limited impact on product availability currently, a prolonged issue in the region could also impact supply in the coming months," the Warsaw-listed discounter, which also owns the Pepco and Dealz brands, said.

The group reported a 2.3% fall in underlying sales in the Christmas quarter, though the extent decline tapered over the period.

Revenue was 1.9 billion euros ($2.1 billion) in the three months to Dec. 31, its fiscal first quarter, a rise of 11% on a constant currency basis, partly reflecting the opening of 203 net new stores, taking the total to 4,832.

The group's gross margin improved 200 basis points year-on-year, driven by the Pepco business.

In October, the group said it would slow down its store opening programme to focus on rebuilding profitability, but it still plans to open at least 400 net new stores in 2023/24.

Shares in Pepco Group, which warned on the outlook twice in September, were up 2.5%, paring losses over the last year to 44%.

($1 = 0.9179 euros)

(Reporting by James Davey; Editing by Kim Coghill and Barbara Lewis)