Brasher’s bolder strategy begins to pay off

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.