Ray of light at Pick n Pay, but jury still out
Stock soars as first phase of turnaround wows-investors — but analysts reserve judgment
PICK n Pay has emerged from the first phase of its turnaround to be met with weighty expectations — a blessing and a curse for its CEO, Richard Brasher.
The expectation from the market and the founding Ackerman family is that Brasher, who arrived in South Africa to take the reins at the struggling retail stalwart two years ago, will deliver on his clearly outlined turnaround plan to the letter. There is little room for error.
Brasher is acutely aware that Pick n Pay cannot “talk itself into a lead”, and that the 2014 financial year, which he called “important and successful” needs to be backed up by expansion — particularly in the company’s top-line growth.
At first blush, the results seemed impressive, and investors piled in to push the share price 5.4% higher this week. But analysts who dug deeper were less emphatic.
Daniel Isaacs, equity analyst at 36ONE Asset Management, summed up reactions to Pick n Pay’s turnover growth of 6.1% when he said: “Top-line growth was slower for Pick n Pay than its competitors. They had some store closures in that number, but if you add that back I don’t think it would be enough to lift it to a point where you could say it was comparative. It was pretty low.”
Brasher admits his current position has taught him to be more patient, even though he expected to take two years to bring about internal stabilisation at Pick n Pay.
“I reorganised and made the business more efficient. I made cuts in our overheads. This set of results is a credit to a supply chain becoming more effective because we’re putting more volume through it.
“We designed an eight-litre engine but we’re only using two litres of it. It wasn’t like I had to spend a lot to get more power.”
In fact, Brasher said, the company’s stable dividend policy was proof that he could have spent more money in the past year, but elected to remain under his capital budget because the company was not ready.
Instead, over two years Brasher has brought a “determined approach towards working capital” and in that time Pick n Pay’s interest payable has more than halved. “I still see a lot of opportunity going forward. If I look at our operating model I still think we can build a faster car, we can build a more profitable business. But part of our priority for the year ahead is to improve the top line.”
This will be tackled when Pick n Pay begins to expand through spending R5-billion in the next two years.
According to Isaacs, the 30- basis-point increase in Pick n Pay’s trading profit margin, from 1.6% to 1.9%, was a pleasant surprise, even if competitor Shoprite enjoys margins of about 5%.
“When margins are low, 30 basis points . . . is actually quite big.”
Isaacs said investors were expecting Pick n Pay’s margins to normalise perhaps to 3% within three or four years. “You can see from the share price that’s exactly what’s being priced in, that sort of expectation.”
He said its historical price-toearnings ratio of 35 times earnings would require Pick n Pay to have per-unit growth in the bottom line of at least 20% in the next three years.
“What Pick n Pay really needs is revenue growth — you need top-line growth to fall through to the bottom line.
“I think that’s going to be the focus in phase two, a more extroverted phase. But it’s a tough market and it has a monster of a competitor. If Pick n Pay oversteps in any way with pricing or strategy, Shoprite will be there to punish it.”
If Pick n Pay oversteps in any way, Shoprite will be there to punish it