Brasher’s bolder strat­egy be­gins to pay off

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

Pick n Pay is firmly on a re­cov­ery path, a rad­i­cal change from the dire straits it was in just two years ago. Credit for the re­cov­ery goes to Pick n Pay CE since March 2013, Richard Brasher, who has brought to bear 26 years of ex­pe­ri­ence gained at Tesco.

Brasher came with a sim­ple phi­los­o­phy. “Re­tail­ing is not com­pli­cated; it’s just hard to do well,” he stressed at the time of his ap­point­ment.

With Brasher at the helm, Pick n Pay is prov­ing it can again do re­tail­ing well. Sig­nalling this, in the re­tailer’s 52 weeks to March 1 2015 was Pick n Pay’s trad­ing mar­gin, a key in­di­ca­tor which leapt from 1,2% in the first half to 2,14% in the sec­ond.

A con­fi­dent Brasher leaves no doubt he is just get­ting into his stride. Phase one of Pick n Pay’s turn­around strat­egy — restor­ing sta­bil­ity — has been “sub­stan­tially achieved”, he de­clared at a re­cent re­sults pre­sen­ta­tion.

“We now have a good foun­da­tion for growth,” said Brasher. It is what he in­tends to de­liver in the sec­ond, “sale [growth] tra­jec­tory” phase of his turn­around strat­egy.

Pick n Pay’s re­cov­ery has

de­liv­ered a 52% head­line EPS (HEPS) rise from the low it hit in 2013 af­ter plum­met­ing for three years. How­ever, the re­cov­ery has so far been driven pri­mar­ily by cost cut­ting.

Far stronger sales growth is now needed in a mar­ket where Pick n Pay has long been los­ing ground to Sho­prite, Spar and Wool­worths. Pick n Pay’s sales growth in its past fi­nan­cial year was a muted 6,1% across its 1 189 store base.

Sales growth could have been stronger if, as Brasher put it, “we had cho­sen to play to the gallery”. In­stead, he stressed, the com­pany’s best long-term in­ter­ests were put first and “push­ing the sales tra­jec­tory but­ton” was de­layed.

Em­pha­sis was placed on fi­nal­is­ing Pick n Pay’s store op­er­at­ing model. Its new model of the rapid ex­pan­sion of cen­tral dis­tri­bu­tion ca­pac­ity is en­abling re­sources and space to be switched from the back end of stores to the sales-driv­ing cus­tomer-fac­ing side.

In fi­nal­is­ing its store model, Pick n Pay also put the brake on capex in the past fi­nan­cial year, spend­ing only R1,05bn of a planned R1,6bn. Pick n Pay is now po­si­tioned to step on the ex­pan­sion ac­cel­er­a­tor.

On the agenda is a big jump in capex on store ex­pan­sion and re­fur­bish­ment, with spend­ing set at R2bn in the cur­rent fi­nan­cial year and R3bn in the next. Pro­vid­ing fire power is vastly im­proved cash flow re­flected in a R700m re­duc­tion in Pick n Pay’s debt in its past fi­nan­cial year.

It left debt at 44% of share­hold­ers’ funds, a far cry from a con­cern­ing 140% just two years ear­lier. “We will not have to go to the mar­ket for cap­i­tal as I was of­ten told we would,” said Brasher.

Pick n Pay’s re­cov­ery is firmly on track, be­lieves Sas­fin Se­cu­ri­ties an­a­lyst Alec Abra­ham. “The ex­e­cu­tion risk is gone. That Pick n Pay is be­ing fixed is now a given,” he says.

Abra­ham looks to Pick n Pay up­ping HEPS 35% in its cur­rent fi­nan­cial year, enough to take HEPS above the pre­vi­ous record high. His fore­cast is not based on de­mand­ing as­sump­tions. “Sales will have to rise by 8% and the trad­ing mar­gin to 2,2%,” says Abra­ham.

Brasher is clearly look­ing for fur­ther mar­gin up­lift. A key fac­tor will be cen­tralised dis­tri­bu­tion through its West­ern Cape and Gaut­eng de­pots and a third, he says, is planned for KwaZulu-Natal. “Cen­tral dis­tri­bu­tion has a big bear­ing on [low­er­ing] costs,” says Abra­ham.

It brings other ad­van­tages which Brasher in­tends ex­ploit­ing. Not least is the abil­ity to ac­com­mo­date many more smaller pro­duc­ers, which bring with them higher-mar­gin pri­vate la­bel op­por­tu­ni­ties.

“Prod­uct in­no­va­tion is needed in SA,” noted Brasher. It is some­thing at which he is a past mas­ter. His notched-up suc­cesses in­clude cre­at­ing Tesco's in­ter­na­tional sourc­ing chain and its en­tire sup­ply base.

Brasher has earned a big vote of con­fi­dence from the mar­ket. The con­sen­sus ver­dict de­liv­ered by 13 an­a­lysts polled by INET BFA rated Pick n Pay a buy. They look to a near dou­bling of the re­tailer’s HEPS over the next three years. Their con­fi­dence ap­pears to be well-founded.

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