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Pick n Pay H1 results: Chris Gilmour – investment analyst, Absa Wealth & Investment Management

‘If they are taking market share it’s only marginal at best.’

SIKI MGABADELI: Pick n Pay came out with a trading update today, saying first-half earnings will increase as a much as 35%, as the company cut back on costs and improved sales. In the 26 weeks to end-August earnings per share, excluding one-time items, were between 51.01c and 55.09c/share.
   So let’s talk about this. We know that retail shares have not really been doing too well this year. There have of course been problems around consumer confidence, consumer spending, and just how much money we have in our pockets.
   Chris Gilmour, analyst with Absa Wealth & Investment Management, joins us now. Chris, thanks for your time today. What did you make of this from Pick n Pay?

CHRIS GILMOUR: Good evening, Siki. I think very much in line with expectations. But there are a couple of – how can I put it diplomatically – health warnings with this one. We have to keep on seeing this kind of improved performance from Pick n Pay because of the extremely high ratings that the share is currently at. We are talking about a price/earnings ratio of about 40 times, which is almost twice what its nearest competitors are. So in other words, it’s priced for perfection.
   Having said that, I don’t want to take anything away from what Mr Richard Brasher, the CEO, has been doing. It’s really been a phenomenal job and this has to continue for the next few years to, if you like, let earnings grow into very, very rarefied rating.

SIKI MGABADELI: And, as you say, they are priced pretty high at the moment and that’s part of the concern for investors when they look at our retail stocks and if we look at the competitors. And, as you say, Pick n Pay is priced at the top end of that.

CHRIS GILMOUR: Absolutely. The other thing we’ve got to be cognisant of, Siki, is if you look at the actual turnover growth, it was relatively pedestrian – 6.8%. It says to me that if they are taking market share it’s only marginal at best. So the bit about cutting costs – that can carry on for a year or two yet but, beyond that, they really do have to start growing the top line. And in an environment like this, where the economy is so languid, that’s going to be a tall order.

SIKI MGABADELI: Can they keep their price increases below inflation and still make money, and what about their competitors as well?

CHRIS GILMOUR: Well, I think there are two keys to that. One is that they’ve got to get more market share, but it’s got to be profitable market share. So in other words they’ve got to take share away from the competitors but they’ve got to do it profitably. And the only way they can do that is by further cutting costs. And, as I said earlier, the leeway for cost-cutting eventually comes to an end and I would say they’ve got two, maybe three years with the cost-cutting and beyond that it’s difficult to see where the competitive advantage comes from.

SIKI MGABADELI: Thanks to Chris Gilmour. Maudi, what do you make of that? I think Chris has put it pretty well – that there is going to be very limited space to cut back on costs. He mentioned the fact that our consumers are under pressure, so trying to build margins there on sales is again going to be a concern.

MAUDI LENTSOANE: Most definitely. I think the performance of Pick n Pay, particularly this year I think it’s up in the region of 10% – just the share price itself. It’s something that started a couple of years ago, I think two years ago when they announced the transformation and the cost-cutting measures that they implemented. They’ve benefited from those, certainly, and we are starting to see the results of all those measures that were implemented. I think they were necessary at the time because they had gone for a long period underperforming the like of Shoprite and Woolies. So they had to do that to try and play a bit of catch-up. They’ve done that very well, but I think it goes to a point where as Chris says, it comes to an end where you can only do so much of cost-cutting. It has to now show in the numbers in terms of your performance. And it’s going to be very difficult, given all the difficulties that the consumer is currently under.

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