Challenging times for Pick n Pay

Pick n Pay has always been one of my favourite investments.

For years it was the dominant retail stock on the JSE, enjoying a premium rating after dependably growing its earnings and increasing its dividends.

The total return (gain in share price plus dividends) since it was listed in 1968 provided the perfect example for analysts called to defend the benefits of equity investments over other asset classes like fixed interest and property.

But over the last few years the group has lost its star billing. Two abortive attempts to establish a foothold in Australia and costly failures in supply chain management, centralised buying and cost controls have allowed the competition to chomp away at its market share.

Recent results demonstrate how far Pick n Pay has fallen behind its rivals, and expose the significant sums that the group will have to invest if it hopes to reclaim its formerly unchallenged position as the country's leading grocer.

I attempted to calculate what management's recent dalliances cost shareholders relative to the market over a five-year period, a time considered by investors, businesses and even some countries, like China, as a reliable measure by which to gauge the success of a plan or strategy.

I was also keen to determine whether investors, who had bought shares late in October 2006 and had gritted their teeth through the current difficult times, could justify their faith in the stock market.

Back in 2006 equity markets were in bull mode, having long left behind worries over the bursting of the internet bubble, 9/11 and the Enron and WorldCom scandals.

Interest rates were on the march up from record low levels in 2002, and the world economy was growing satisfactorily. It was only in March 2007 that signs of overheating in the US property market emerged, and even then the authorities believed that any fallout would be confined to the US.

In May 2008 the JSE reached an all-time peak but when giant investment banker Lehman Brothers was allowed to fail in September of that year, the umbrella All Share Index almost halved on concerns that the global economy was plunging into an abyss.

Quick remedial action by governments and central bankers restored a level of confidence in world financial markets, sparking a recovery in 2009, but two years later the global economy is still battling to shrug off the harms of the crisis.

I estimated that R100 invested in Pick n Pay in October 2006 would probably be worth R129 today. (I have ignored dividends for the purpose of the exercise and although important, it would hardly have altered the conclusions reached.)

It's comforting to know that Pick n Pay virtually tracked the gain on the JSE's Top40 share index (R100 invested equals R128) but distressing to contrast the performance with the company's peer group.

Using a similar comparison, R100 invested in archrival Shoprite would have yielded R450, Clicks R360, Mr Price R351, Truworths R279, Massmart R261, Woolworths R251 and Spar R245.

A recovery in consumer spending, fuelled by real wage increases and reduced interest rates combined with outstanding executive management teams as well as aggressive demand from foreign investors, pushed the retailers' performances above the overall index's gain and beyond the reach of other sectors on the JSE. But in terms of individual performances, a number of other companies were noteworthy challengers.

Generally, R100 invested in the industrial index on the JSE would have returned R178 (12.5%pa) compared with R112 (2.5% pa) in resources and R98 (-0.5%pa) in financials. Financial shares held up far better than I imagined, but Investec (R61) and Old Mutual (R57), two companies with primary listings in London, were battered by the misfortune that gripped major money centres and weighed on the sectors' overall return.

However, it was a banking share that provided investors the biggest cheer, offering a path to prosperity in trying times. Unsecured lender (a politically correct term for micro- lender) Capitec stunned sceptics by bruising competition with dazzling profits that pushed its share price into the stratosphere. The sum of R100 invested in October 2006 would have realised R640 on Friday.

Other meteoric rises among the more popular traders on the JSE included mining companies Kumba Iron Ore (R342) and Exxaro (R304).

Yet, despite magical recoveries in commodity prices, it was our top-ranked and highly-capitalised resource shares that weighed on the JSE's rebound.

The booby prizes go to paper producer Sappi (R22), platinum giant Angloplats (R64) and steel producer ArcelorMittal (R73). Even with the gold price close to heaven at the moment, R100 in AngloGold is only worth R109 today, R97 in Goldfields and R85 in Harmony.