PICK N PAY
Pick n Pay Stores has managed a turnaround after years of underperformance. We consider the sustainability of this success.
pick n Pay is one of the country’s largest food retailers, with its main listed rivals including Shoprite, Spar and Woolworths. Founded in 1967 by Raymond Ackerman when he purchased four stores in Cape Town, the retail group has since grown its footprint to more than 1 200 stores in South Africa, Namibia, Zambia, Zimbabwe, Swaziland, Botswana and Lesotho.
After years of underperformance, the group’s turnaround plans, under the stewardship of former Tesco executive Richard Brasher, are starting to bear fruit. This has led to its share price substantially outperforming its peers over the past 12 months. The Pick n Pay Stores share price is up more than 40% over the period, compared with a 9.9% gain for Spar, 0.1% for Shoprite and -3.2% for Woolworths. (Investors should distinguish between Pick n Pay Stores, which is the holding company for the Pick n Pay and Boxer retail stores, and Pick n Pay Holdings, which is controlled by the Ackerman family and whose sole purpose is the holding of the controlling shareholding in Pick n Pay Stores.)
Since Brasher’s appointment as CEO in 2013, Pick n Pay has made some progress to regain lost market share, control costs and improve efficiencies, which the group says is evident through its improved product availability, better ranges and fresher products.
In the 26 weeks to 30 August 2015, Pick n Pay grew turnover 8.5% year-on-year to R34.9bn, while the group’s trading profit operating margin improved to 1.3% (2014: 1.2%), and the profit before tax margin increased to 1.3% (2014: 1.1%). Trading expenses, expressed as a percentage of turnover, reduced from 17.5% to 17.3% in the period. These gains contributed to the massive 23% increase in profit before tax of R451m.
The improved performance was driven in part by the group’s expanding footprint – Pick n Pay opened 83 new stores over the period – and an improved supply chain as the group continues to invest in its distribution centres, as opposed to the direct-to-store model it used to follow. The latter model requires Pick n Pay to maintain substantial storeroom space at its supermarkets, where it has to pay retail rental rates.
In the three years since his appointment, Brasher seems to have made substantial progress to fix operations and improve profitability. But the question begs, has the company shifted from being “family run” to being “family controlled and professionally run”, as this will drive company performance against its peers. If it slips back into underperformance mode, it will awaken new calls for the Ackerman family’s control structure, where it controls Pick n Pay Stores through its control of Pick n Pay Holdings, to be dismantled.
Possible scenario: Pick n Pay Stores has been trading in a complex broadening pattern. Its latest breakout through 6 650c/ share has ended the six-month downward consolidation – a move that should secure further gains to the 8 950c/share targeted mark in the short term (one to six months). However, the three-week relative strength index (RSI) is extremely overbought, and is bound to trigger a near-term correction. If support holds firmly above 6 600c/ share, the uptrend should resume towards the targeted mark. Alternative scenario: A reversal back through 6 085c/share would mark defeat and could trigger panic selling back to the 5 000c/ share mark.