Pick n Pay falls as earnings forecast comes in lower

IN an earnings update on Friday Pick n Pay warned that market conditions were likely to remain difficult in the second half. This echoed sentiment from other South African retailers who have continued to feel the pain as consumers face sustained pressure from rising costs, higher interest rates, increases in taxes and escalating prices due to a weakening rand.

The grocer, which will report half-year results later this month, said earnings per share would increase between 15% and 25%. This was lower than market expectations, sending its shares to a five-month low as they declined almost 8%. Revenue growth accelerated 8.5% in the 26 weeks ended August 30, compared with 6.1%.

Alec Abraham, a senior retail analyst at Sasfin Securities, said: “They didn’t improve profit as much as I had anticipated.”

Pick n Pay, with a market capitalisation of about R30bn, said its turnaround was gaining momentum despite an increasingly challenging trading environment. As part of its recovery, the retailer has shut underperforming stores, improved supply chain and information technology, and overhauled its buying functions. Some of its stores have also been refitted and modernised.

Pick n Pay’s shares have risen 18% year to date. “Their share price has been moving up so strongly over the last couple of weeks and I think it’s because people are obsessed about Stikeez. They’re saying this is going to be the best thing for Pick n Pay but it’s just a promotion and you’re going to see a bit of uptick — it’s not going to make the business,” Mr Abraham said.

Stikeez figurines are collected through spending R150 or more at Pick n Pay.

Cratos Capital portfolio manager Ron Klipin said Pick n Pay still had some way to go in its transformation. “(The share is) still expensive on forward price:earnings of around 25-28. Turnover growth was probably due to efficiencies in the supply chain … good marketing strategies and customer spend via loyalty rewards are likely to have been positive aspects.

“Major cost cutting, in terms of restructure of management and termination of consulting fees, should have been positive for margin enhancement.”

Once the darling of the South African retail sector, a litany of errors, including an exorbitant cost base and failure to implement centralised distribution, saw the group fall from grace as Shoprite’s Checkers and Woolworths took market share.

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