How to make sense of the market’s reaction to Pick n Pay’s results, released last week?
The retailer’s shares slumped 9% on the day, stumping some analysts given its 11.5% rise in half-year revenue, to R51.3bn, and a 22% rise in pretax profit to R588m.
One analyst, who declined to be named, tells the FM that Pick n Pay had managed expectations poorly and that the results weren’t fantastic because last year’s numbers were hit by civil unrest.
Yet Pick n Pay’s detailed trading update, released on October 3, resulted in a sharp rally in the shares — as much as 18% — until the release of the actual interim numbers two weeks later.
To some extent it was only clear in the interim numbers that sales growth is largely being driven by Pick n Pay’s Boxer division, and that “when you strip out Boxer, South Africa looks very weak”, the analyst says. Without clothing and liquor, the core Pick n Pay segment is also under pressure, he says. “The investment case in Pick n Pay is Boxer.”
Others see it differently. “I thought they were great results,” says independent research analyst Chris Gilmour. He believes the group is in an investment phase, whereas previously it was all about cost-cutting and restructuring.
Wayne McCurrie, FNB Wealth portfolio manager, says: “I was surprised by the share price weakness … I don’t think the market reaction was warranted.” McCurrie sees this as a buying opportunity.
Taking last week’s slump into account, Pick n Pay shares are now up 15% for the year, putting them on a forward p:e of 20. That compares with Shoprite’s forward p:e of 18.5 and Spar’s lowly 12 multiple.
All Weather Capital portfolio manager Chris Reddy, meanwhile, says the market is probably worried about Pick n Pay’s cautious outlook owing to persistent load-shedding and rising input costs.
Still, as far as Boxer is concerned, Pick n Pay is clearly delivering on its promises. This was the first time the group showed segmental performance, and turnover at Boxer had shot up 27.2% to R15bn in the half-year ended August 28. Its contribution now stands at a hefty 30% of group sales, and there are plans to double Boxer sales and its footprint over the next four years.
The other growth driver in the group is clothing; sales in the segment rose 14.8%. A store rollout is gaining momentum too.
But within the original Pick n Pay unit, things are looking rather limp. Its South African division (including Pick n Pay and the mid-range QualiSave) grew sales just 5.4%, to R34.5bn — in other words at below the inflation rate.
Pick n Pay CEO Pieter Boone argues that results will really start coming through only in the next financial year, and has asked for patience as the retailer transforms itself into three distinct brands.
The group has revamped 41 stores so far, and says these stores are achieving weekly sales growth of 15% compared with a year ago, with a 20% increase in customer transactions and a rise in average basket size of 3%. Boone says the numbers offer “proof that we are on the right track”.
But the analyst who asked not to be named says it’s not clear if it’s the revamped formatting that’s driving QualiSave or the store renewal itself. “The problem is that heading into the 2024 financial year the environment for the consumer is going to get significantly tougher because of interest rate hikes, and it sucks up consumer income. The market doesn’t want to have to wait to 2024.”
I was surprised by the share price weakness … I don’t think the market reaction was warranted
— Wayne McCurrie
He does, however, back the Boxer push. “It will be interesting to see what happens with Boxer when it expands in the rest of the country and competes with Shoprite and Usave. It’s doing the right things, but it has been dealt a tough hand.”
Meanwhile, Reddy says the negative cash flow is also something that the market is paying more attention to, especially in a rising rate environment. While existing gearing is low, this is expected to increase as Pick n Pay spends R10bn on its stores over the next four years.
“Of key importance will be how accretive this capex will be in an environment where margins are under pressure and competition is increasing its footprints as well,” he says.
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