The market seemed not to know what to make of Pick n Pay’s upbeat interim results to 26 August 2018.
The retail group, which released results before the market opened, saw its share price spike from R65.13 to almost R68.50 in early trade, but by mid-afternoon on Tuesday it was back at R64.39, trading more than 1% down on the previous day’s close.
Yet the group ticked every possible box, from growing turnover and earnings to increasing market share and efficiencies as its turnaround continued apace.
Cited by CEO Richard Brasher as its strongest six-month trade performance, measured by volume, for more than five years, the group grew turnover by 6.4% to R41.2 billion – or by 3.8% on a like-for-like basis, and headline earnings by 80% or a normalised 17% to 100.18c a share, with a similar increase in its dividend.
The group’s 2017 results have been restated, removing the once-off impact of its voluntary severance programme of May 2017, which amounted to R200 million – or R250 million for the cost of the severance packages, net of related labour cost savings and tax.
Brasher says action to reduce operating costs and increase productivity created a leaner and stronger business that is able to create “headroom to invest in lower prices, better promotions and greater value for customers”.
Notably, volume growth of 3.5% reflects market share gains over the past six months as gains made through efficiencies, including at distribution level, enabled it to “invest in price” with its internal inflation at 0.3% against official food inflation of 3.5%. Prices were reduced on 2 500 grocery lines.
Pick n Pay’s online distribution grew sales by 25% and traffic on its new website increased by almost 70%, with a 30% increase in customer registrations.
The Smart Shopper programme provided R2.4 billion in shopper discounts in the six months.
Trading profit from South African operations was up 11.9% and pre-tax profit was up 16.7%, and the group said its Boxer chain, aimed at lower-income customers, grew strongly while its liquor division increased like-for-like turnover by almost 20%.
Its rest-of-Africa division grew pre-tax profit by 7.3%, underpinned by a strong performance from TM Supermarkets in Zimbabwe.
The group, which has 1 732 stores, opened 60 new stores – and closed 13 underperforming stores – in six months.
Sasfin senior equity analyst Alec Abraham says the figures are finally reflecting the results of the group’s long-term turnaround.
Internal inflation is unusually low for Pick n Pay, indicating that it has taken profit and savings and pumped them into price, and that has paid off. Pick n Pay has shown the market it can get volume growth, he says. It is providing a better shopping environment with improved availability, and there is still room for further improvement, with its continued shift to central distribution. There is also room for further margin growth, as the margin is still half of what it was at the peak before the slump.
Abraham was surprised at the market’s reaction as the results were good. He does not think Pick n Pay is expensive at current levels. There are indications that there is room “for at least two to three years growth as it drives the margin up further. Up until now, it effectively incurred the cost of running two distribution systems,” he says. Currently 80% of product is coming from central distribution, and this is set to go higher. “I think we are still going to see another step change in the margin and good volume growth.”
Chairman Gareth Ackerman acknowledged the group’s improvements and its longevity as it celebrates 50 years as a JSE-listed company. At the same time, he weighed in on the need for South Africa to provide a better environment for doing business. Taking a dig at President Cyril Ramaphosa’s preference for consultation, discussion, and consensus with regards to the things the country needs to do to improve, he said “no further think tanks or summits are going to achieve this.”
“Business’s voice has been mute for too long. The truth of it is that the economy has run out of road.”
He says business must speak out about public policy, and that South Africa must manage the economy carefully and prudently, reduce debt, have a business- and investor-friendly environment, fair taxation, thoughtful and well-planned public policy-making, must tackle crime and must have initiatives to employ young people.
He also spoke up about South Africa Social Security Agency (Sassa) payments, a responsibility that is borne in part by retailers, who become crime targets at payout time.