Pick n Pay’s share price performance this year has probably shredded any hope that the chain might be on track to reclaim its crown as the country’s pre-eminent retailer.
That title was long ago bestowed on rival Shoprite, but Pick n Pay’s fall from top spot in the early 2000s has since defined its place in local investment portfolios. And since the release of unimpressive year-end numbers last week, its share price has crumbled almost 15%, taking its year-to-date decline to 36% — a nine-year low. Contrast that with Spar’s 18.7% gain and Shoprite’s 7% wobble.
The biggest problem is that Pick n Pay has a stubbornly lower operating margin than its peers, which makes it particularly vulnerable to external shocks such as load-shedding. The retailer is looking at annual costs of R1bn if load-shedding continues at current levels; it spent R522m just to keep business going in the year to end-February. That was half its profit after tax of R1.1bn. Group profits would have risen 7% had it not been for the blackouts; instead, they dropped 15%.
While turnover rose 8.9%, with its key Boxer division showing sales growth of 20.2%, Pick n Pay’s headline earnings ended 16.3% lower. Worse, the group warned that next year’s earnings may be no better, depending on how bad load-shedding gets. It slashed its dividend cover by more than 16%.
Operationally, things could hardly be tougher; now shortages of food across certain categories could be on the cards
Operationally, things could hardly be tougher; now shortages of food across certain categories could be on the cards thanks to load-shedding, warns CEO Pieter Boone.
“When stage 8 happens, that will impact food supply availability and we will see in certain categories suppliers not able to meet the high demand,” he says. Bread supplies have already been hit.
“That is really a plea to the government to stand up and act decisively. We lack leadership at the moment.”
Besides its diesel spend, Pick n Pay has committed at least R200m for an energy resilience plan to find new lighting and refrigeration solutions.
Several market commentators have concerns about the retailer’s Ekuseni programme, which includes converting some Pick n Pay stores to the new low-cost brand, QualiSave. But Boone says it is the right strategy and has already led to transaction growth.
“It’s confirming we’re on the right track. A certain level of patience is required but there are enough green shoots to show we’re on the right path. You need to be agile and pragmatic to deal with a higher level of load-shedding than when we approved the plan. We’ve said this is a transition year, we don’t expect a meaningful improvement in earnings,” says Boone.
Yet there are persistent issues with the company that worry analysts. A research update from RMB Morgan Stanley’s Sean Holmes says the group’s poor segmental disclosure is one of the biggest reasons for the share’s deep discount to its underlying intrinsic value.
He calculates that losses in the corporate division might have risen to as much as R1.2bn in financial 2023, noting that Boxer and Pick n Pay corporate in South Africa saw a rapid slowdown in second-half sales. “In our view, much of Checkers’s market share gains in recent years have come from Pick n Pay corporate,” writes Holmes.
Pick n Pay’s clothing division, however, remains a shining success. Sales at standalone stores grew 15.3% and online sales more than doubled.
Casparus Treurnicht, portfolio manager at Gryphon Asset Management, says Pick n Pay is not making enough progress with Ekuseni and is failing to win back market share lost to Shoprite. “We have heard of improvements, but where are the numbers that support this? Is it worth it from a return on capital perspective?” asks Treurnicht.
We have heard of improvements, but where are the numbers that support this? Is it worth it from a return on capital perspective?
— Casparus Treurnicht
Nedbank analysts Paul Steegers and Shaun Chauke are more upbeat about Ekuseni, calling it a “credible” rebranding and store rollout strategy.
Already, says Pick n Pay, customers are buying bigger baskets than last year, and bigger baskets than in nonconverted stores. The group has also kept internal food inflation at 8.5% — but it’s not clear at which point rising costs could be passed on to consumers.
A year ago Pick n Pay announced a plan to cut costs by R3bn over three years and grow its market share by 3%. It achieved R800m in savings in this financial year and is set for a fairly significant jobs purge, after announcing plans to do away with several hundred junior manager positions.
Boone is sticking with the vision of his predecessor, Richard Brasher, to boost the Boxer brand, which the group believes will be another growth engine alongside clothing.
“The opening of an additional 200 stores in the next two years will be according to plan, but even then will not be at full potential,” Boone says. The Western Cape only has 11 Boxer stores, but the potential is closer to 80 stores.
A participant in the analyst presentation asked Boone, a Dutch national, if this was the most difficult environment he’d faced as a CEO.
“Never a dull moment, that’s the way I describe my journey so far in this beautiful country, and I say this with a smile. It’s country No 9 that I’m now in; it’s quite a challenge but every challenge provides opportunity as well.”
He tells the FM that since arriving in South Africa he’s experienced Covid, bushfires, riots, flooding and load-shedding — on top of the political problems.
“I haven’t for one single second regretted taking the position to come here and work on this strategy.”
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