[TOP STORY] Pepkor interims reflect an increasingly exciting business

CEO Leon Lourens talks Pep, Pep Home, newly acquired Brazilian business Avenida, Paxi, and the company’s trajectory.

SIMON BROWN: I’m chatting with Pepkor CEO, Leon Lourens, on the results for the six months ending March. Revenue up 3.3% normalised headline earnings up 12.1%; 144 new stores. Leon, I appreciate the time today. I want to come to those new stores, but first the KZN floods, which fall outside of the reporting period. I imagine there must have been some impact for Pepkor.

LEON LOURENS: Sure, there was an impact for Pep. One was just keep in mind that the DC [distribution centre] that got flooded is only a Pep DC, and Pep has three DCs. So it doesn’t affect the whole [Pepkor] group, but it does affect the Pep business.

What has happened since [is that] obviously that DC was out of operation for about five weeks at least, and it’s still only back to limited operations. So obviously our service levels of some products in the stores have gone down, and that would affect the sales in the Pep business. But then we are insured against business interruption as well – so the losses themselves would be picked up by insurance, fortunately, but it does cause a lot of disruption in the business. What was ‘great’ about the incident is how the DC recovered and the commitment of the people and the can-do attitude of the people to get it back operating within five weeks was actually remarkable under the circumstances.

SIMON BROWN: I’ll take your point on that. I want to touch on inflation and input costs. All the CEOs I chat to are struggling to varying degrees. How much are you able – perhaps because of the slightly different industry you are in – to manage the inflationary pressures that we’re seeing globally?

LEON LOURENS: We are going to have inflation on our products.

For the past two to four seasons our product inflation has always hovered around 4% to 5%. We estimate it will probably go up closer to 8%, 9% for the next season, which is from August, and probably the season after that too.

So that’s quite high for our consumer. Initially that probably would’ve been higher but, through re-engineering of product, changing the contribution of different departments and price points, we’ve been able to contain it to about an 8%, 9% increase. That increase is high, I agree, especially for lower-income earners, but unfortunately that’s the environment that causes that.

SIMON BROWN: Pep Home – we chatted about this when we chatted on your full-year results, which would have been late last year. [The interim results show Pep Home saw] sales growth [of] 27.2%. That brand within your stable continues to absolutely shine in what’s a bunch of shining brands.

Read: Pepkor takes aim at Mr Price with new growth format

LEON LOURENS: Yes, it’s done exceptionally well. I mean I think the last time we also discussed the sort of cult following that Pep Home has been able to get from consumers. That’s … their direct and target market, [with] big online support and social media support that they have, so it has really done well.

I think we can even do better if we get our stockholding right, because we’ve actually been selling too fast; there’s much more opportunity in the home business than we are utilising at the moment.

So it’s very exciting and it’s becoming a sizeable business now; we are talking about over 330 stores now.

SIMON BROWN: You say there are 330 there. I mentioned up front 144 new in the period. You mentioned in the results over the three years you’ve opened 830 stores. That’s solid growth. Is that a sort of growth rate that you are anticipating to continue in the years ahead?

LEON LOURENS: Yes, we are very confident of that. We work on an average of about 300 stores per year. This year will be 350 stores in actual; that’ve already been sort of signed up and that’s going to happen.

So yes, we are very confident that over the next three to five years, at least, we can continue opening, let’s say an average 300 stores per year.

SIMON BROWN: Your acquisition of the Brazilian value retailer [Avenida] – as I understand, that was completed during the period, although it didn’t really contribute much in the period.

Listen/read: Pepkor to acquire Brazilian retailer Avenida

LEON LOURENS: No, it’s still relatively small. Remember it only came into our sort of accounting from the February 1, when the deal was signed off. So it makes a very small contribution at the moment, but on an annual basis, on a revenue basis, [it’s] probably 4% of our turnover at present. We believe that in future, as we grow that business – and there’s a huge potential for it to grow – it will become a much bigger part of our business.

SIMON BROWN: Last question: your Paxi parcel. I know we’ve talked about this before. How many parcels are you shipping now? I don’t know how you measure it – is it daily, weekly, monthly?

LEON LOURENS: Well, we ship about 11 000 parcels per day, and that’s substantially higher than we would’ve thought four or five years ago that we could achieve. So we are quite happy with that. I still think that there’s a lot of potential going forward, especially … if we do third-party distributions – in other words, you basically then become the distribution agent for other for other large companies that are doing e-commerce – I think there’s a lot of potential going forward, despite the fact that it’s already high.

SIMON BROWN: Yes – 11 000 a day. We’ll leave it there. Leon Lourens, Pepkor CEO, has been talking results for six months ending March.

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