Pick n Pay warns of profit cut

Pick n Pay's big investment in transforming itself into a globally competitive retailer will cut into its half-year profit, which it predicts will be 35%-45% lower than last year.

Once the leader of the South African retailing pack, Pick n Pay has increasingly come under fire for its ''ludicrously high'' costs, strikes and laggard growth, which have led to its having to try to catch up to rivals Shoprite and Woolworths.

In February it reported an 18.3% decline in full-year profit for what it described as the toughest trading period in its 44-year history.

Shoprite had a 9.8% rise in turnover in the 52 weeks to June for Checkers.

''A lot of what's happening with Pick n Pay is the culmination of a confluence of strategic errors that opened the door for Massmart: entering Australia, not concentrating on general merchandise in their Hypermarkets, not putting in centralised distribution timeously and not keeping ahead of the pack with IT,'' said Absa investment analyst Chris Gilmour.

Ratings agency Fitch downgraded the company's national long-term rating to A from A+ last month, reflecting its expectation that Pick n Pay's weakened credit profile would recover more slowly in the 2012-2013 financial year than the agency had thought.

The retailer said that, given the size of its investment in transformation, headline earnings per share and earnings per share from continuing operations would be down by 35%-45%, for the period under review.

''The main contributors [to the fall] are the upfront launch costs of Smart Shopper, the planning for a specialist category buying organisation and the continuous investment in an efficient centralised distribution system,'' it said.

On a brighter note, Pick n Pay's turnover is expected to increase by about 7.4% despite the continued tough economic conditions, dominated by low inflation and highly competitive trading.

Pick n Pay attributed the increase to the introduction of its Smart Shopper loyalty programme in March, which now has over 4 million customers.

More good news was that, after 15 months, it completed the R1.3-billion sale of Franklins to Sydney-based Metcash last month.

Analysts lauded Pick n Pay's decision in July last year to quit Australia after failing to penetrate the market.

The group's attention in recent months has also been directed at its African expansion plans, which, according to Gilmour, represent a sound move.

''They have to look at Africa. Our local market is on its way to being saturated. The kind of growth they'd get in Africa easily eclipses the kind they get in South Africa,'' he said.

Late last month Pick n Pay opened its first Mauritian store, following its first store opening in Mozambique, in June, and its second store opening, in Zambia, in March. Its results are due out on Wednesday. - I-Net Bridge