When Sean Summers reassumed the leadership role at Pick n Pay the group was rushing headlong into the abyss. Everything that could go wrong for a retailer was happening — loss of market share, being crippled by debt, technical insolvency and being deserted by its formerly loyal base of customers.
Most managers, when staring into the abyss that was Pick n Pay last year, would have taken fright and opted for a safer job elsewhere. But not Summers — he loves a scrap. In Nietzsche’s Beyond Good and Evil there is a famous quote that goes “if you look long into an abyss, the abyss looks into you”.
Summers didn’t just stare into the abyss; he dived straight into it and got stuck into the job in hand. It’s been an exceptionally tough first year for him and the group. Major surgery in the form of a drastic downsizing of the business has taken place. The control structure has been greatly democratised.
A successful R4bn rights offer has been completed and a private placement of shares in Boxer is nearing completion. The group appears, slowly but surely, to be turning around. Summers aims to halve the size of the interim trading loss at the full-year stage. Someone, somewhere should write a book on this successful turnaround strategy.
For the six months to end-August Pick n Pay group turnover rose 3.7% to R56.1bn, which translates to 2.9% like-for-like growth. Gross profit margin was 60 basis points lower at 17.9%, while trading profit was 159% higher at R82.5m. Earnings before interest, taxation, depreciation and amortisation was 38% lower at R187.7m. Headline earnings per share were 24% lower at minus 136.6c.
But the segmental split between Pick n Pay and Boxer was breathtaking; Pick n Pay’s sales went backwards by 0.3% to R36.3bn while Boxer’s sales grew 12% to R19.8bn. Pick n Pay incurred a R719m trading loss while Boxer’s trading profit was R801m.
At this point it’s all about Boxer, which is one of the fastest-growing retail chains globally. There can be little doubt that Boxer will be a roaring success when it is finally listed on the JSE.
The clothing business also appears to be performing well, but with no actual numbers to go on it’s difficult to gauge how important this business can be in years to come.
The group recently announced that it is exiting its joint venture into Nigeria. This comes as no surprise, as many other SA retailers have left Nigeria in recent years. Though superficially attractive in terms of having a huge population, the hazards of trying to run a foreign-owned business or even a joint venture in Nigeria are overwhelming.
Much better news has come in the announcement of a partnership between Pick n Pay and FNB, whereby selected RMB Private Bank clients will receive substantial discounts on Pick n Pay’s asap! home delivery service. Qualifying clients will be able to receive their rewards in the form of eBucks. This partially makes up for the decision by Discovery to exclude Pick n Pay from its healthy foods campaign.
So the groundwork for Pick n Pay’s turnaround has been achieved. The balance sheet is looking far better, Boxer is likely to receive a warm reception on listing and the Pick n Pay chain is likely to make significantly reduced losses by financial year-end.
Summers and his team have hauled this ailing icon out of the abyss and it’s doubtful whether anyone else could have achieved this much so quickly. But don’t expect the next couple of years to result in a rapid return to historical levels of profitability. That will still take time and Summers needs to appoint a succession team to take Pick n Pay to the next level.
In the meantime, it probably makes sense to invest in Boxer directly rather than in Pick n Pay, as the rewards of doing so are likely to be enjoyed sooner.
• Gilmour is an investment analyst.
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