As Pick n Pay released its worst results yet, incoming CEO Sean Summers welcomed each analyst to the event with an enthusiastic handshake and energy that few people show before 8am.
Summers is not lacking in the passion he says he wants to inject back into the business.
Having just started the job and jetting in from London, he insisted (with less than two weeks’ notice) on an in-person results presentation, when most have shifted online.
The event started promptly at 8am, an hour earlier than most. Summers, who had apparently arrived at work at 6am, fielded questions with speed and honesty.
But can passion, energy and truthfulness fix Pick n Pay’s broken balance sheet, which is in a dire state?
The retailer made a loss before tax of R837m in the half-year to August 27. It would have been a loss of R272m had it not been for one-off costs that included retrenchments, load-shedding and a distribution centre move. Still, this adjusted figure is a lot lower than the R588m profit in the prior first half.
And its debt has risen drastically.
Net debt sits at about R3.8bn — up marginally from R3.67bn six months ago and a whopping 171% higher than it was in August 2022.
As interest rates have skyrocketed, the interest paid on its debt reached R243m, but trading profit came in at a mere R31m.
What this means is Pick n Pay is not making enough money to cover the interest on its debt, let alone the actual debt.
“Make no mistake, Pick n Pay is in deep trouble,” Chris Gilmour, a long-time retail analyst, says.
“Their balance sheet can’t accommodate much more debt.”
Summers is honest that “Pick n Pay is on the back foot”.
The question is can he fix the business with the balance sheet he has inherited?
He really needs to increase sales volumes as Pick n Pay stores are selling too little and retail needs high volumes to counteract its low profit margins. The group also needs to improve the private label goods on offer and spruce up older stores.
It has dedicated R4bn in capital expenditure for the next year. But it is struggling financially and earlier this year switched from a plan to buy 60% of its new Gauteng distribution centre to renting it.
Make no mistake, Pick n Pay is in deep trouble
— Chris Gilmour
There are two views on Pick n Pay’s financial constraints.
Retail analyst Syd Vianello thinks Pick n Pay needs a rights issue, raising money from existing shareholders to allow it to grow the business. But this would be controversial as it would dilute existing shareholders’ ownership and could result in an even lower share price — when Pick n Pay’s share price is already down almost 55% this year.
Vianello says the group is not opening any new Pick n Pay branded stores, and without expansion they will go backwards, he warns. Retail needs to grow its footprint to grow, Vianello previously told Business Day. It is expanding Boxer stores — mainly low-margin liquor, however.
Vianello has previously said Pick n Pay paid out too much of its profit over the years, essentially paying the Ackerman family. The founding family owns about 25% of the shares and would thus take home a quarter of the dividend payout. The generous payouts resulted in less investment into growing the business.
Instead, competitors such as Shoprite have reinvested in their business and are light years ahead in terms of store footprint, merchandise, and back-end IT and logistics systems.
Sasfin analyst Alec Abraham says Pick n Pay doesn’t need to spend more, they need to spend better.
“It is not like Pick n Pay doesn’t spend on marketing, store refurbishments or have private label goods. Spending much more won’t necessarily lead to more sales. It’s just that they don’t seem to get any bang for their buck with the existing spending.
“What they desperately need to do is improve the returns they generate off the assets they currently own: boost the ebitda and improve their working capital management,” he said.
Stock is staying on the shelves for about 10 days longer than it did five years ago, while the time it has to pay suppliers has stayed roughly the same, putting pressure on cash flow, he says.
Abraham says Pick n Pay could be prudent by skipping its full-year dividend. “This is arguably to compensate for the handsome dividends they paid historically at the cost of underinvesting in the business.”
Summers on Wednesday hinted that there will be no full-year dividend — a sign he is in control of the business.
Gilmour, who followed Pick n Pay when Summers was MD and then CEO from 1999 to 2007, believes in him.
“Summers will stop the bleeding ... He can reinstil a sense of purpose into the business.”
With a long road ahead, Summers will need all the purpose he can muster, and 6am starts he can get.
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