Pick n Pay: a new Boone sweeps clean

Pick n Pay has been on a charge since March, with the share price up around 30% since the start of that month. Over the past 12 months though, the performance is disappointing with an increase of under 3%. Is that about to change?

In the 52 weeks to 27 February 2022 (retailers report based on weeks rather than calendar years), group turnover increased by 5.2% and gross profit margin fell by 100bps to 18.8%. After putting significant focus on cutting R1 billion in head office costs over the past two years, trading expenses only increased by 4.2%.

This turned an average performance at gross profit level into a strong performance at operating profit level. With a 6.7% decrease in net finance costs added to the mix, headline earnings per share (HEPS) increased by a decent 14.5%.

The dividend per share is 23% higher, a move that institutional investors will appreciate.

This result has been achieved against the backdrop of civil unrest in July 2021. It feels like a really long time ago now, but it falls into this reporting period. There were also trading restrictions on liquor, another issue that I’ve tried hard to forget about. The group recovered all material damage losses from SASRIA and also received R145.2 million in interim business interruption insurance payments.

Sales momentum was strong towards the end of the period, with 7.4% growth in the final quarter. As we move into a new reporting period, the growth should look good at top-line level as Pick n Pay is lapping the period that was significantly impacted by the riots.

The decrease in gross profit was partly attributed to substantial investment in price, which means the retailer absorbs some of the inflationary pressure rather than passing all of it on to customers. Price inflation was just 2.9% vs. CPI Food inflation of 6.2%. It’s not an exaggeration to say that our grocers are saving our people in this environment.

Pick n Pay indicates that the civil unrest impacted gross margin by 80bps. If Covid restrictions are stripped out of the base year, then gross margin of 19.6% in FY22 was only 50bps lower than 20.1% in FY21. Still, the retailers cannot absorb consumer price increases forever and ongoing inflation is going to favour the most efficient players in the sector.

Looking deeper, Pick n Pay Clothing continues to win market share as a pocket of excellence in the group, posting 21% sales growth. The group has refurbished 40 Pick n Pay Select supermarkets (aimed squarely at Checkers FreshX stores) and these have performed well. Bottles was rebranded to Pick n Pay asap! in August 2021 and has enjoyed ongoing consumer demand for convenient deliveries, growing 300% year-on-year since August.

Boxer remains an important growth area, with 200 new Boxer stores planned over the next three years. There are 66 new Pick n Pay Clothing stores planned for FY23. It is encouraging to see the group focusing in the right places.

Strategically, it seems as though Pick n Pay is FINALLY going to distinguish the Select stores from the middle-income stores. This is exactly what Shoprite Group has done so brilliantly with Checkers.

Recently-appointed CEO Pieter Boone is doing the right things here. This is the strongest update I’ve seen from Pick n Pay.

To learn more about the new strategy, you can read this investor presentation.

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