Investors didn’t appear overly impressed with the recent trading update from Pick n Pay although it was one of the most upbeat trading statements from the retail sector in months.
Like-for-like volume growth of 3.5% in the six months to end-August is a sterling performance given that most of its competitors are struggling to hold on to their previous reporting period’s sales. Evidently savings on labour costs have been used to entice customers with lower prices.
After an initial slight firming, following the update, the retailer’s share price eased back to around R65. At this level it’s on a price:earnings ratio of a comparatively expensive 23 times; Shoprite is on 19 times and Woolworths on 14 times. It may be that, despite indications of a much-improved performance, investors have become too jittery about the grim conditions in which Pick n Pay and its competitors are trading to push ratings much higher.
Comparison with the previous financial year have been complicated by the R200m one-off costs relating to the voluntary severance packages accepted by around 3,500 employees. The trading update indicates that if those costs are stripped out of the earlier period then the normalised headline earnings a share show an increase of around 20%.
The interim results are due out in mid-October and they may, or may not, prompt a review of the share price. At its current level it looks uncomfortably tight for CEO Richard Brasher’s 1-million share options. Those options were due to vest in November 2017 on condition that the weighted average share price for the 20 days to November 12 was at least R68.03. That condition was not met and the options would have lapsed had Brasher not been granted a 12-month extension.
The UK provides some useful, and somewhat scary, insights into the future of retail in SA. As much as 17% of retail sales in the UK are now online, versus just 1% in SA.
The high penetration of online commerce is already hurting retailers and their landlords in Britain. JSE-listed shopping centre owners Hammerson and Intu Properties are by no means immune.
David Brockton, an analyst at London-based Liberum Capital, says there has been “some churn in the tenant base” across the board as the retail sector struggles to adapt to changing consumer habits, as well as cyclical pressure linked to Brexit.
“The industry is still trying to establish what its position is longer term as e-commerce continues to eat into retailers’ sales.”
Bricks-and-mortar retail outlets are having to compete with nimbler, more cost- effective competitors such as Amazon.
“So the argument is to what extent the rents have to rebase to compete on a level playing field,” Brockton says.
No doubt SA mall owners such as Hyprop and Resilient will feel the pinch as e-commerce gains traction in SA, but Brockton is optimistic that malls will be here to stay for some time.
This is partly because people “still want to go out and look at goods, and there’s an element of social interaction that shopping malls bring”.
“Within our society there’s a desire to be in a place socialising and to be around other people. So while it’s easy to be bearish on the prospects of retail real estate, it will have a long term presence — there will be a valuation floor, we’re just trying to find where that level is in the UK.”
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