Pick n Pay revival let down by disappointing earnings growth
THE Pick n Pay turnaround continues but the market wants to see more earnings growth from the country’s second-largest food retailer, which is highly dependent on sales growth.
The turnaround started in earnest under Richard Brasher, who took over as CEO four years ago. He came from a successful career at Tesco in the UK. At the time, Pick n Pay was losing market share, lagging in centralised distribution, and failing to keep up with the store roll-outs of competitors.
Brasher is 55 and, unlike most executives around town, isn’t on a contract. He has an arrangement with the company that while he’s “useful” and “enjoying himself”, he’ll stay.
“There’s a benefit in not having a contract in that we rely instead on trust,” said Brasher this week, adding that an increase in profitability also tended to keep shareholders happier. “I’ve enjoyed working for a great brand and I’m proud of the results over the last four years. It’s in better shape.”
Challenges included consistency in approach and an increasingly challenging economy. “And it would have been really helpful to have a strong economy on my back, but it’s not everything. I think occasionally people look for things to blame rather than take responsibility,” he said.
Chris Gilmour, an analyst at Absa Investments and Wealth Management, said Brasher had made a huge difference to the company. “He’s been pivotal.”
“These results were a little bit below what people were expecting. Top-line growth of 7% isn’t great. So Brasher has squeezed performance by tightening things up, taking out costs, and it’s worked. But now you’re in a situation where you need to get top-line growth.”
The Ackerman family still controls the company through a voting structure, but the much maligned pyramid structure has been disbanded.
Brasher said: “We are a South African-based retailer with expansion in Africa. I don’t think there’s any rush to try and do something dramatic; it’s a measured expansion. We opened 12 stores in Africa this year and plan to open more. I don’t see it as a gold rush.”
As for the rating downgrades, Brasher said instability in international markets was not good news, “but it doesn’t have to be overplayed. We’re servicing customers with their grocery requirements — earning in rand, paying in rand.”
This week the retailer delivered its eighth successive period of real earnings growth. Pick n Pay’s share price trades at about R61, higher than the R48 when Brasher took over at the end of January 2013. Profit growth for the year ending February was higher than sales growth, primarily due to better cost efficiency. And the profit margin has more than doubled since 2013 to about 2.3%.
But the results disappointed the market and the share price fell 4.4% on Wednesday, its steepest fall in five months, after missing expectations. Earnings excluding one-time items rose 17% to R2.58 a share for the 52 weeks ending February, lower than a media estimate of 14 analysts of R2.67, according to Bloomberg.
Headline earnings were up 18% and though it looks like a good number in a difficult market, the market was expecting above 20%.
Alec Abraham, Sasfin’s senior equity analyst, said the group had delivered a good set of results but the expectation was for a better performance on sales growth. “The turnover growth has been disappointing, particularly considering BrashHe er’s ‘sales-led recovery’ mantra since joining the group.
“Unfortunately, every year since then the turnover growth at Pick n Pay has lagged its competitors.” But Abraham lauded the improvement in margins and cost control. “The big let-down was top line.”
suspected that Pick n Pay was losing more market share to Checkers in upmarket areas than it was taking from Shoprite through its Boxer rollout in lower-income areas. “In terms of getting the business right, they’re doing the right things,” he said.
The “next generation” stores have been upgraded and offer faster checkout and a more expansive fresh food and personal care range to attract shoppers at the upper end.
At the lower-income end, the business has 230 Boxer stores and recently worked with the Gauteng government on a project with spaza-shop owners to modernise their stores. “It’s a massive opportunity,” said Brasher. Six spaza shops, franchisee township models, have been modernised in Soweto and have all increased turnover and profitability since Pick n Pay started working with them.
Brasher said the spaza stores were not a big money-spinner for the retailer, it was more about assisting and transferring skills to those who owned and managed the stores.
Are the days of big-box hyperstores over? “Never say never, but the odds are not good to launch more.” What Pick n Pay was doing was modernising and downsizing them. “Big shops have their place but you have to be good at it,” Brasher said.
Pick n Pay referred to some “disruption to trade” due to refurbishing 62 stores and closing 12 underperformers in the 52 weeks to the end of February in stating its revenue growth of 7% to R79-billion.
In the year under review, the group opened 151 new stores, including 12 elsewhere in Africa. Stores in Ghana and Nigeria are expected to open within two years. The group spent R1.9-billion on upgrading stores last year and budgeted R1.8-billion for this year.
Selling-price inflation was 6.1% compared with CPI food inflation of 11%.
The Smart Shopper loyalty programme helped lift the top line but there is a perception that it was overly generous and it has been overhauled.
The retailer, which turns 50 this year, has invested R500million to slash the prices of key items including meat, fruit and vegetables. Brasher expects the turnaround to take two or three more years.
Brasher has squeezed performance by tightening things up
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