Pick n Pay profit up, but analysts worry

IT seemed good news when retailer Pick n Pay released half-year results for the six months to August this week, showing a 6.8% rise in turnover, 35% growth in profit before tax and 35.8% improvement in earnings per share. It also opened 46 new stores in the period.

IT seemed good news when retailer Pick n Pay released half-year results for the six months to August this week, showing a 6.8% rise in turnover, 35% growth in profit before tax and 35.8% improvement in earnings per share. It also opened 46 new stores in the period.

CEO Richard Brasher said that Pick n Pay, which also operates the Boxer retail brand, had delivered substantially better profit performance in a tough market. It had made big gains in efficiency, was forging ahead with its transformation to a centralised delivery system and had improved its stock availability levels.

But some investors weren't immediately impressed by Brasher's numbers. Pick n Pay's share price fell more than 6% soon after the announcement, before regaining ground the next day .

Absa Asset Management analyst Chris Gilmour said the retailer's muted growth in its top line was not enough to placate impatient investors.

"We were looking for better than that. A figure of 6.8% tells me Pick n Pay is probably still losing market share, although the slide may have been arrested," he said.

Pick n Pay bristled in response to this view, saying the top-line figures were available in its trading statement two weeks before the announcement. It also said the share price had dipped only 2.4% this year, better than the 19% drop in Shoprite's stock and the 6.8% fall for Woolworths.

"We haven't just cut costs. We've made improvements over the last three half-periods, and we're seeing the results now. To move the top line more would jeopardise the turnaround. Like-for-like sales are up 4%, transactions are up, basket size is up 6.4%," Brasher said.

He also trumpe ted Pick n Pay's investments in pricing and its Brand Match plan, which aims to tell shoppers when they're getting the best deal - if shoppers could have bought their basket for less at one of the company's four major competitors, they're given vouchers for the difference.

"Over 60% of the vouchers are for less than R5. We tend to lose only when other retailers have promotions," he said.

Gilmour said that Pick n Pay's investment in pricing was evident, but there was a limit to how much cost-cutting could achieve.

"This is tangible evidence they're getting the pricing right. It will probably work, but it will take time. It has to start growing the top line, which is the most difficult thing to do against a backdrop where retail sales are coming off," he said.

Part of the problem is that there is an inverse correlation between interest rates and retail sales - so when interest rates rise as they are now, sales drop.

For investors, Pick n Pay's shares are more expensive than those of its competitors. It trades on a price-to-earnings ratio of 37.3 versus Shoprite's 18.9.

Gilmour said Pick n Pay would have to maintain its momentum for at least three to four years because of this demanding price-to-earnings ratio.

"It is outrageously high. Shoprite has half that rating and enjoys a margin of around 5%, with similar top-line growth. [Pick n Pay has] reluctantly pulled out of a fool's errand in Australia, and redirected those resources to growing in Africa, but it will take a while to see the benefits," Gilmour said.

Pick n Pay's trading margin improved to 1.2% in the past six months.

Alec Abraham, senior equity analyst at Sasfin Securities, said a 32% improvement in headline earnings was a good result, but this was achieved in the context of a fix-up phase.

"You could expect high growth rates off such a low base, and there was low-hanging fruit in terms of efficiencies."

Tougher tasks lie ahead.

Said Abraham: "There were a number of factors I looked for that disappointed me. There's the continued loss of market share as well as the disappointment of customers in terms of innovation and on-shelf availability. A large part of that is due to the change from direct-store delivery to a central- distribution model."

Woolworths grabbed market share from Pick n Pay, and its expansion in lower-income areas was disappointing.

"I fear it's losing core customers to Woolworths and not making enough of a splash in the lower-income groups because Shoprite is already there. From a positioning point of view, it still looks vulnerable.

"If you're growing turnover at 6.8%, below the market, and you need to expand into markets where you're not represented, Pick n Pay is not doing a good enough job," Abraham said."

Brasher tried to temper expectations about the pace of growth by emphasising that Pick n Pay had to ensure any new retail space was profitable.

"Our total turnover reflects lower new space growth in the first half of the year, but we will be opening another 80 stores in the second half of this year." Abraham said that Pick n Pay was still duplicating costs by running two distribution models because direct distribution was still too little of all stock shipped to stores.

"The PE is high, and if the troubles were reflected in the share price it should have been trading at R25 or R30 for the last few years."

Pick n Pay was trading at a shade under R53 on Friday.