They’re cheap, but Poundland CEO Jim McCarthy’s new stores are cheerfully paying dividends. Peter Cripps reports

By helping consumers look after the pennies, Poundland has more than looked after itself. Last week, the variety retailer reported full-year sales up 28.7% to £509.8m while pre-tax profits were up a whopping 130.2% to £19.8m.

CEO Jim McCarthy, a born salesman with the gift of the gab, is confident there is more to come.

"Poundland is a good business in bad times and a great one in better times. I think in a year's time you will be looking at results that are just as good," he says.

"Post-recession consumers will still shop for value. Some of their behaviours will be sticky, and that augurs well for retailers that understand their customers."

But will Poundland really be able sustain its impressive growth trajectory when the good times roll once more?

Since taking the helm almost four years ago, McCarthy has put his extensive experience in grocery convenience to good use. He talks of the "treasure trove effect" achieved by Poundland's eclectic offer, which encompasses everything from racy 'love cuffs' to baked beans. In the past year alone, he has doubled the number of core grocery SKUs on sale to now account for more than 30% of sales, putting Poundland squarely in competition with c-stores.

Stocking more food was the right thing to do, even if margins on those lines were lower, he says. "We listen to customers who tell us they want to see a better range of essential items," he reasons. "Food is one of those."

The introduction of chilled food alongside dried goods was another inspired move. Sandwiches, milk, cheese, ham and bacon have been rolled out to 245 stores, and some stores in tourist locations now have ice cream freezers. Milk has become one of its biggest sellers, claims McCarthy, who also plans to extend its fresh offer. As revealed last week, he is considering selling branded loaves.

But with like-for-like sales up just 0.7%, it's not grocery or Poundland's eclectic offering that's driving growth: it's new store openings. There were 56 in the 12 months to 31 March, including its first in Northern Ireland. Another 25 stores have opened since March, taking the current total to 293, and Poundland is well on target to smash the 50 openings target set for this financial year.

McCarthy believes there's scope to grow the estate to 800 stores ultimately. Poundland has already acquired some 50 former Woolworths stores and there are plenty more bargain leaseholds up for grabs on the high street in the wake of the recession, he points out.

Although he maintains that 0.7% like-for-like sales growth is good in the current market, he makes no bones of the fact that the real growth will come from new store openings, something that is far easier now landlords are more receptive.

"Landlords are enthusiastic about having Poundland as a tenant," he says. "Our financial performance is important and we attract strong footfall so any other premises nearby are let more easily when we move in. We have become the candle to the moth."

And now he can put his money where his mouth is. In May, private equity firm Warburg Pincus bought the chain from Advent International for a reported £200m in cash. As a result, Poundland has no debt to service. "The great thing is that we are in agreement on strategy and for the next few years can deliver that without being distracted by a possible sale," says McCarthy.

His ambitions are not limited to the UK he has mooted taking the concept abroad but in the short term, he's concentrating on spreading Poundland's footprint here. A big upside to the chain's rapid expansion is that shortly it will be big enough to start advertising nationally something it has never done before. This could signal a major step-change in Poundland's evolution, believes McCarthy.

"We use stars from Corrie to launch new stores but apart from that all our publicity is through word of mouth and press," he says. "Some people say we are the best-kept secret on the high street. We are not yet at a critical mass where you can make best use of advertising. When we have 400 to 500 stores, we can turn our attention to advertising on a national basis. That will be in three years' time, maybe two."

Meanwhile, Poundland will continue honing its grocery offer. In the past year it has created branded shelves for Heinz and WeightWatchers, among others, while an agreement with Whitworths has seen it make 1.5kg packs of sugar to keep it within Poundland's price point. Others are following suit with bespoke pack sizes.

Having made so much progress, the forthcoming VAT rise is a major irritation. While Poundland benefited from the 13-month-long 2.5 percentage point decrease, the only way to protect its 30%-plus gross margin will be through more ingenious buying from January when the new rate kicks in.

"The VAT rise is unwelcome and may have a wider impact on consumer spending," warns McCarthy. "But we have been selling products for £1 for ages and are used to dealing with VAT hikes and inflation."

When Warburg bought Poundland, McCarthy could have cashed in his chips and trousered £5m. Instead, both he and his senior management invested in the business. "It's a commitment to our new owners to delivering," he says.

And delivering McCarthy is, which is why the business should remain sound as a pound for some time to come.

Jim McCarthy snapshot
Age: 54
Educated: Edgbaston, Birmingham
Lives: Barford, Warwickshire
Family life: Married to Rosie. Two boys, James, 22, and Sean, 19
Career: McCarthy began his career with Dillons newsagents as a fresh-faced trainee, leaving in 1982 only to return three years later as MD. He moved on to T&S in 1989 as group retail director, becoming joint MD and finally CEO. When T&S convenience stores were bought by Tesco in 2003 he stayed on as adviser, helping to integrate the two companies. He left in 2004 to become MD of convenience with Sainsbury's and joined Poundland in 2006. He is an operating partner at Advent International which sold Poundland in June this year advising on retail acquisitions.
What do you do in your spare time? Play squash and five-a-side, watch rugby, drink wine, play chess and do the weekly pub quiz.
And your secret passion? I have a very large selection of cigarette cards, which I treasure.