Pick n Pay Stores has man­aged a turn­around af­ter years of un­der­per­for­mance. We con­sider the sus­tain­abil­ity of this suc­cess.

Finweek English Edition - - FRONT PAGE - By Mox­ima Gama edi­to­rial@fin­week.co.za Mox­ima Gama has been rated as one of the top 5 tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the Re­sea

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.

What next?

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.

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