Pick n Pay finally turns the corner
As Shoprite has stumbled, analysts are impressed by its rival’s performance in a very difficult market.
It’s been a good while since Pick n Pay has had an edge over its slick rival Shoprite, which over the years has largely come out ahead.
Until this year, that is.
Shoprite got knocked by the problematic implementation of its new IT system, a labour dispute at one of its service providers and a drop in turnover at some of its cross-border operations.
It was not helped by a difficult economy, which limited the spending power of local consumers. The severity of the downturn could be seen in Shoprite saying school supplies outsold toys over the Christmas period.
The result was a revenue rise of just 2.6% to R77.54bn, net profit falling 22.4% to R2.26bn and basic earnings per share slumping 21.9% in the six months to December.
For its part, Pick n Pay put out a trading update last week showing that it had shrugged off the troubled economy. Revenue is expected to rise by as much as 9.6% for the 53 weeks to end-March. Headline EPS are seen to be 20%-30% higher.
On the whole, analysts are impressed by Pick n Pay’s performance in a very difficult market.
"The trading statement highlighted a very strong performance. With sales and comparable store sales outperforming listed peers, it’s safe to say that it has gained market share," says Argon equity analyst Bjorn Samuels.
Gryphon research analyst and portfolio manager Casparus Treurnicht agrees with Samuels that Pick n Pay managed to take market share.
He thinks Shoprite was the main loser, as it was distracted by its IT and labour problems. "With Shoprite management’s focus directed to these issues — and let’s not forget about its problems in Angola — it is quite understandable that Pick n Pay took market share."
Though Shoprite’s weakness seemingly played a part in Pick n Pay’s expected earnings and revenue rises, credit should also go to the grocer’s management for pushing through much-needed changes.
"Pick n Pay CEO Richard Brasher and new retail MD Pedro da Silva outlined a series of new strategic initiatives at the Pick n Pay investor day in November last year, which we believe are starting to bear fruit," says Samuels.
Back then, they said the group was modernising stores and changing its store format to fit its target market.
Treurnicht says these upgrades, as well as its investment in the Smart Shopper loyalty programme, are starting to pay off.
Though it has had success when it comes to modernising operations, Treurnicht says the jury is still out on its efforts to lower labour costs. In the past financial year, the group attempted to cut labour costs by implementing a voluntary severance programme, which resulted in a one-off severance cost of R250m.
As a result, employee costs, excluding the cost associated with the severance programme, fell to 7.9% of turnover for the past financial year, down from 8.3% the year before.
Even so, Treurnicht says it is too early to judge the programme’s impact.
"The labour issue … I have more mixed feelings about since it was a costly exercise, but perhaps it is ‘de-bottlenecking’ some of the operational issues."
Samuels says the problem for the group when it comes to cutting labour costs is that the benefits of the severance programme are now baked into its 2019 financial year. This means it will find it difficult to grow revenues at a greater rate than expenses, because the savings from the programme have been moved into the base for the 2020 financial year.
Pick n Pay’s local operations have done well, but like Shoprite it also has cross-border operations with its 49% stake in Zimbabwean-based TM Supermarkets.
Samuels says many investors are waiting to see how TM Supermarkets have been affected by the significant currency devaluation. TM Supermarkets is important for Pick n Pay because it contributed as much as 16% to interim profits.
Now, though Pick n Pay may have done well in a difficult economy, it doesn’t necessarily mean it should be considered a buy.
"Retailers in general are not on top of my list, sector wise. I expect retail to struggle over the next few years," Treurnicht says.