Pick n Pay’s results for the year ended February 28 were notable from a variety of perspectives; they coincided with the 55th anniversary of Pick n Pay’s founding in 1967, the low-end Boxer chain has now been around for 45 years and the group’s new strategy was unveiled. The actual results, as good as they were in such a challenging retail environment, seemed to be of secondary importance to the new strategy that management will be judged on.
Turnover for the year grew by a relatively modest 5.2%, and the gross profit margin declined from 19.8% to 18.8%. Other income — predominantly insurance proceeds from the civil unrest in July last year — rose almost 68%. The increase in trading expenses was well contained at only 4.2%, while the trading margin rose from 2.9% to 3.1%. Net finance costs were almost 7% lower at R1.15 billion and the tax rate was 28.7% against 31.3% previously. Diluted headline earnings per share (HEPS) rose 15% to 261.65c and the group declared a total dividend of 221.15c, an increase of 23%.
Besides the distortion caused by the civil unrest, the notable feature of the results is the profound improvement in clothing sales, which carry a higher profit margin than grocery items. Year-on-year growth in clothing was 21%, much in line with the strong growth in such sales throughout the local industry last year. The group plans to open another 66 new clothing stores in this financial year.
New CEO Pieter Boone kicked off the strategy session with a sobering graph detailing the group’s poor total shareholder returns when measured against a weighted peer group consisting of Spar, Shoprite, Massmart and Woolworths over the past five years. Pick n Pay lags significantly on one-, three- and five-year views, but Boone sees that as an opportunity to enhance shareholder returns from a low base. He recognises that investors want greater insight into divisional performance and has promised to provide this.
Management estimates that its total market share across all segments is 16%, with 23% of the more affluent market, 27% of the middle market and only 11% of the less affluent market. Given the depressed state of the SA economy and the likelihood that it will remain that way for years, the less affluent sector is where the focus of attention should be, as the broad middle class is likely to be squeezed progressively. That’s why Pick n Pay’s main thrust will be Boxer, a discounter firmly focused on the less affluent sector of the economy.
The plan is to add 200 new Boxer stores during the next three years and to double the unit’s sales by financial year 2026. Boxer is the closest South African retailer to the Aldi and Lidl models from Germany. Like them, Boxer is a limited assortment operation, holding only 3,000 stock-keeping units (skus) at any point. That minimises inventory costs and forces the company to concentrate on known value items in the stores.
A new chain, code-named Project Red, will fill the space between Boxer and conventional Pick n Pay stores. These will stock 8,000 skus compared with 18,000 skus in a full line Pick n Pay.
Other notable aspects of the strategy include the completion of the group’s Eastport distribution centre, the largest in Africa and 45% larger than its Longmeadow distribution centre in Kempton Park. Pick n Pay also announced the establishment of a commercial services agreement with Takealot, under which Pick n Pay customers will use Takealot’s Mr D app for home delivery of groceries.
Pick n Pay has a long way to go before it gets anywhere near Shoprite’s level of sales and profitability. But under Boone, the group has committed to holding itself accountable with a set of bold new initiatives. This could be a long game.
• Gilmour is an independent investment analyst with Salmour Research.
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