Pick n Pay shakes off Covid’s shackles

Pick n Pay CEO Richard Brasher is fond of saying humans overestimate what can be done in the short term and underestimate what can be achieved in the long term.

It’s an apt sentiment, considering the 50%-60% plunge in headline EPS (HEPS) that the retailer is likely to report for its half-year results to end-August.

That’s despite the mountains of toilet paper and other items stockpiled by skittish consumers ahead of the lockdown in March.

But Covid-19 operational costs of R150m (including cleaning, store closures and staff bonuses), as well as trading bans which impacted 20% of its revenue, and a voluntary severance package, all ate into its profit.

Still, investment group Ninety One, which bought shares in Pick n Pay recently, argues that it did very well, given the circumstances.

Its entire first half from March to August was hit by some form of lockdown trading ban, limiting the sale of clothing, liquor or cigarettes.

Ninety One retail analyst Achumile Mashalaba says: "If you strip out the Covid-19 costs after tax from its HEPS, then Pick n Pay’s earnings will be down between 8.5% and 18.5%, which we think is a pretty resilient performance." He thinks that locally, Pick n Pay is more than holding its own.

He calls Pick n Pay’s 9.9% sales (price and volume) growth in SA for the core grocery business, excluding liquor, tobacco and clothing, "extremely impressive".

Including all its merchandise categories, Pick n Pay’s SA turnover grew 3.4%, with like-for-like sales up 1.7%.

Trying to get a sense of how Pick n Pay stacks up against its peers, Spar, Shoprite and Woolworths, is tricky, given the retailers’ different reporting periods and the absence of published market share data.

For example, Shoprite’s SA second-half sales growth, to June 28, was 7.5%.

That figure, unlike Pick n Pay’s, includes cigarette sales, which were banned from late March to mid-August.

Lulama Qongqo, investment analyst at Mergence, believes Shoprite did better than Pick n Pay during the panic-buying March period before the lockdown.

In March, she drove to multiple Pick n Pay stores to do "walkabouts and confirmed that it was out of nonperishables and cleaning goods, the categories that dominated the panic buying".

Qongqo says: "This would have played into Shoprite’s hands as it had more inventory than normal going into the panic-buying period."

As for online, she says: "Shoprite also ramped up its online offering really quickly while Pick n Pay’s online shopping experience remained subpar and it tried to make up for that by partnering with the Bottles app, but it was not competitive on price."

While the volume of online sales is still nowhere close to outperforming in-store sales, Qongqo says: "I think the market share gained online will be stickier than brick and mortar because of how superior Checkers’ online offering is to Pick n Pay’s."

It may explain why Pick n Pay remains in third place as far as share price performance goes, year to date. Its stock is down almost 17%, against Spar’s 1.7% fall and Shoprite’s 14.7% gain. Pick n Pay is only marginally ahead of Woolworths, which has lost 25% this year.

Pick n Pay has revealed that its voluntary severance package, affecting 1,400 staff members, has cost it R100m. At its August 4 AGM, the retailer flagged the severance packages as a reason for expected lower earnings.

At the time, All Weather Capital chief investment officer Shane Watkins asked what the process would cost, but Pick n Pay refused to release the figure.

Watkins described the move then as "oddly secretive" and, given the impact it would have on earnings, as "misleading".

Pick n Pay says it expects, in the second half, to recoup the cost of letting staff go.

Brasher’s plans to step down this year were thwarted by Covid-19. He has spent seven years trying to make Pick n Pay more efficient and keep internal costs and price inflation down.

By the end of its 2020 financial year, Pick n Pay had produced pre-tax profit growth of 15.2% in SA. Mashalaba says it shows "how well positioned the business was going into Covid-19".

Like Brasher, he’s taking a longer view and says that a poor African performance aside, Pick n Pay is "still in a very good position in the SA environment".