Pick n Pay CEO Richard Brasher may not have thought they were a particularly impressive set of figures — but the market did.

Around the same time he was telling analysts at a presentation that the first-half 2020 results were "not the best we’ve ever presented, but in the context respectable", excited investors were pushing the share price 10.54% higher to a four-month peak of R67.98.

So excited were they about the profit increase that most investors seem to have taken the heart-stoppingly complicated International Financial Reporting Standard 16 changes in their stride.

Changing times: Traditionally, retailers’ format was focused on geography, now it is more about demographics. Picture: Sunday Times/Alon Skuy
Changing times: Traditionally, retailers’ format was focused on geography, now it is more about demographics. Picture: Sunday Times/Alon Skuy

To Pick n Pay’s credit, it was well prepared for the changes to the accounting treatment of leases and, perhaps more significantly, it had prepared the investment community for it.

And it helped that a 1.3% volume increase outperformed macroeconomic growth, says Thomas Blamey of Cadiz Asset Management.

"The greater focus on company-owned stores, increased levels of centralisation and higher private-label penetration resulted in an uplift in gross profit margin and translated into operating profit growth of 16.4%," says Blamey, who points out that the centralised system now manages close to 80% of stock.

He says the latest results show the benefit of actions taken by management over the past few years.

Brasher tells the FM he was "rather surprised" by the level of enthusiasm, but says he doesn’t worry too much about the share price because it’s something he can’t control. But one of the key things he and his team can control are stock levels — and they did pretty well on that front.

Like-for-like inventory was down 5% and, given management’s ramped up focus on "range optimisation", further reductions must be on the cards.

"Range optimisation" in Pick n Pay-speak seems to be what Shoprite refers to as "precision retailing".

Sasfin senior analyst Alec Abraham says loyalty cards and the use of data analytics has enabled the retailers to be more aggressively efficient in their stock management.

"Pick n Pay seems to be tiering its stores on the basis of demographics rather than geography," says Abraham, who points out that in retail "stock management" is everything.

Brasher confirms that traditionally, retailers’ format was focused on geography: now it is more about demographics.

The critical issue is ensuring each store has the optimum range of stock — nothing more, nothing less. Getting the right balance means "we can eliminate waste and provide customers with more of what they want", explains Brasher.

He reckons there is scope for further improvement, thanks to the steady progress in computing power. "In the old days you couldn’t afford to store data, let alone analyse it."

The volume and margin increases — to 2.7% for the first half from 2.6% last year — are the outcome of a delicate balancing act by management.

For the past few years, improvements in profitability have been used to reduce prices and entice more customers into the stores.

It was an appropriate strategy given the tough trading conditions and the fact that its major competitor, Shoprite, which had been knocked off course by a capex speed bump, was vulnerable to more aggressive competition.

This time around, a portion of the profit gains were used to lift margins although much of it went on keeping internal inflation at just 2.2%.

Margins were also helped by the relatively stronger performance by company-owned stores, which generate better gross margins for Pick n Pay, compared with franchise stores. Unlike Woolworths, who forced its franchisees to hand back their stores about 10 years ago, Pick n Pay has no intention of abandoning its franchisees.

The 719 franchise stores, against 1,019 that are holding company-owned, are an important part of the group’s offering and provide a useful entrepreneurial contribution.

More significantly, as one senior executive says, it allows Pick n Pay to have a bigger brand presence than it would otherwise, which in turn allows it to get bigger rebates from manufacturers.

Despite acknowledging the "good" performance, Cadiz won’t be one of the asset managers rushing to buy up the shares at this stage. At its current improved price the share is on a demanding 27.6 p:e rating, significantly ahead of Shoprite and Spar.

Blamey says the Pick n Pay share price already reflects an improvement in profitability over the next few years. "Hence the potential for the Pick n Pay share price to significantly outperform the market is low."