Retailer Pick n Pay warned on Wednesday that it may have to reprioritise its capital expenditure to use some of the money towards footing the increasing bill of keeping the lights on at its operations during the daily load-shedding episodes.
Despite its mooted plans to relook how it allocates its internal resources, Pick n Pay said any cuts to its growth initiatives will not affect its star performer, Boxer.
The company said in a trading update that it was trying to adapt to the “new reality” of load-shedding, which has resulted in it incurring “increased generator repairs and maintenance costs and some additional food waste costs”.
“Depending on the energy options pursued, the group may need to reprioritise other demands for capital investment. In this event, priority will continue to be given to funding expansion of the group’s Boxer and Clothing growth engines, which are likely to deliver the best combination of sales growth and sustainable returns in the coming years,” the company said.
“It is clear that progress will not be rapid. The group therefore takes the view that the current crisis is a permanent new reality, requiring a rapid, determined and concerted response. We are determined to be on the front foot in adapting our Ekuseni strategic plan and our operations successfully to the new reality.”
News that the group might have to relook its capital allocation comes 10 months after it had outlined its accelerated capital investment programme which committed R3.5bn in capital investment in financial year 2023, up from R2.5bn in the prior year. The Ekuseni strategic plan said R1.4bn of the R2.5bn capex money is set aside to accelerate the Boxer business.
The company, which has more than 1,900 stores across the country, said while it had spent an additional R346m year on year on diesel to run generators at stores in the first 10 months of the financial year, it was experiencing increased generator repairs and maintenance costs, coupled with food waste costs.
Energy plan
It said diesel generators were not designed to run for many hours on end and suffer breakdowns — which has forced it to look for more sustainable solutions.
The company gave a glimpse of its energy resilience plan. One of its key features is that it is in negotiations with its landlords “to ensure that they enable us to maximise installation of solar electricity on the roofs of our stores or allocate us a fair share of renewable electricity that they generate”.
The company was also installing inverter and battery power solutions across its operations.
Pick n Pay’s shares plunged nearly 8% on Wednesday after the trading update suggested it continues to lag its rival Shoprite. The company reported selling less than the prior period in the 17 weeks to December 25, and battling higher costs to mitigate load-shedding.
In an update, SA growth in the 17 weeks to December 25 was 6.1% lower than price growth, which averaged 10% as soft commodity prices spiked globally. This means it is seeing dropping volumes or selling less than the prior period.
Under the Ekuseni strategy the company continues to upgrade stores and focus on creating two distinct brands focusing on lower- and higher-end customers, but the trading update that covers 10 months and 17 weeks to December 25 suggests the company is taking longer than expected to turn around.
Heavier backpack
Gryphon analyst Casparus Treurnicht said “it does not look like it is going to yield any results very soon. The ship is obviously taking longer to turn.
“This just once again proves that Shoprite performs better and how far ahead they’ve become than their peers. It’s harder to catch up when it’s uphill and you’re carrying a heavier backpack.”
While exact comparisons are difficult, as Shoprite has a different reporting period, SA’s largest grocer grew sales by 1.5% in the six months to January 2.
Shoprite’s trading update showed prices grew 9.4% and like-for-like growth was 11.1%. “Shoprite gave Pick n Pay “a bloody nose with this result”, said Treurnicht.
Boxer, which serves the discount market, was reporting like-for-like growth of 20.75% and like-for-like growth of 7.6% in the 10 months to December 25, which prompted Nedbank analyst Paul Steegers to call it a “standout performer”.
Clothing sales grew 11% in the ten months of the financial year and in 17 weeks to Christmas grew 6.2% above Mr Price and Ackermans, showing Pick n Pay is likely to be stealing market share from other retailers.
All Weather Capital analyst Chris Reddy said he suspects dividends may be reduced as its growth is a new priority for the CEO.
“The company might have to relook its dividend policy, suggesting a short-term reduction in dividend payout, as it reprioritises capital allocation to expand its clothing divisions and Boxer, mitigate load-shedding and revamp stores.
“At the same time, Pick n Pay’s debt is rising and it faces a weaker consumer that is spending less,” Reddy said.
On Tuesday, leaders of the Consumer Goods Council of SA that represents 12,000 organisations and retailers wrote to President Cyril Ramaphosa, asking him to solve the energy crisis.
The record-high load-shedding in 2022, resulting in 207 days of power cuts, forced the retailer, and others to fork out much cash to buy diesel to run generators for hours.
Don't for one minute think the retailers will absorb the extra cost of diesel. Initially yes, but margins will widen progressively as costs recovered via higher selling prices. Ultimate loser is you and me.
— Syd Vianello (@Siddels1000) February 8, 2023
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