Pick n Pay down amid retail price pressure

Pick n Pay’s share price slumped 2.5% in early trade on Thursday. The weakness was probably not a delayed response to interim results released earlier in the week as all the retailers were under price pressure. The drop reversed a short-term stronger trend and pushed against the generally favourable response to the group’s interim results.

Although the top line was disappointing, analysts seem encouraged by evidence that the management is continuing to strengthen the trading margin. It remains significantly below Shoprite’s level, which looks impossible for competitors to replicate, but is comfortably ahead of the wafer-thin levels recorded in 2013.

Particularly important is evidence of progress on two key fronts: centralisation of distribution and labour costs. Pick n Pay has struggled for years to deal with the challenges of centralised distribution but now seems to be getting it right.

CEO Richard Brasher says the retailer can lift the percentage of groceries distributed centrally from 65% to around 85% within about two years.

As for labour costs, the voluntary severance programme (VSP) cut the workforce by 10% and is expected to deliver substantial cost savings in financial 2019. The VSP is surely chilling evidence that there are no longer any sacred cows at Pick n Pay. It is the first exercise of its kind the group has implemented and must have been difficult for the Ackerman family, which has long regarded itself as an exemplary employer, and rightly so.

Unfortunately the employees tended to take advantage of this approach leaving the group with a comparatively “less flexible” employee complement. Over time, the 10% will be replaced by more flexible workers, which is presumably where the cost savings will come from.

While it’s never been as high-profile as other “mobility” counters such as Imperial and Super Group, there is an admirable resilience at Value Group. Looking past extraordinary costs associated with a black economic empowerment transaction, there was pleasing operational traction in the interim period to end-August across all platforms despite the dour economic environment.

The most reassuring figure was the more than doubling in cash flow from operations to R66m. The 33% hike in the dividend also reflects a certain confidence for solid second-half trading. What is most encouraging is that 2016’s acquisition of retail logistics business Key looks as if it could pay off handsomely. This specialist business warehouses, distributes and wholesales a variety of fastmoving consumer goods products into the convenience, formal and informal sector — such as independent traders, fuel forecourts and small retailers.

Key is now fully integrated into Value’s Johannesburg facility, and it seems reasonable to expect a fairly rapid expansion of the retail footprint as well as the extraction of meaningful synergies and savings.

Whether Value will continue along the acquisition track remains to be seen. But with the company’s shares trading at a seven-time-earnings multiple, there may be some urging from shareholders to redouble share repurchase efforts. In the interim period, 1.9-million shares were bought back. But with a market capitalisation of less than R700m, there may be others — with predatory intentions — also hungrily eyeing Value’s undervalued scrip.