Investments set stage for Pick n Pay growth

2007 was a year of heavy investment for South African retailer Pick n Pay, but the group is certain that these key investments will set the course for the next stage of growth, CEO
Nick Badminton said on Tuesday.

"We have made a number of key investments to set the course for the next stage of Pick n Pay's growth, including SAP, our distribution facility, our brand refresh, the Score conversions and other key capital-intensive projects.

"We are confident that these investments will bear fruit for us in the coming years," he said.

Seven new corporate stores were opened during the year, with an additional six being converted to Family franchise stores.

The year ahead will see a further six new corporate stores opened, in addition to the refurbished flagships in Claremont, Cape Town and Benmore, Johannesburg.

Twenty Family franchise stores were opened, including the six corporate conversions and a further seven Score conversions.

More stores next year

Next year will see a considerable acceleration with a forecast of 50 new Family stores including three corporate conversions, and in line with the conversion process, 29 Score conversions.

Two new Hypermarkets were opened including the Greenstone Mall Hyper in Edenvale and the group's first Soweto-based store, both of which are performing well.

Norwood's revamp was completed during the period, showing the same trading densities with less space.

"These new generation Hypers are all outperforming at sales level and are proving popular with a broad spectrum of customers.

"However, the cost pressures of opening these stores, along with other refurbished new format stores, did lead to a reduced profit contribution for the year. We anticipate a much better performance next year," Badminton explained.

Eighteen new liquor stores and seven clothing stores were also opened, with plans to open 20 more liquor stores and two clothing stores in the year ahead. Score's operating performance was in line with last year.

Expanding the brand

"The conversion of Score stores to the Pick n Pay Family model is an extremely exciting development for the Group, as we are able to expand the Pick n Pay brand into this market as well as create a franchise opportunity for historically disadvantaged entrepreneurs.

To date we have converted seven stores, all of which are showing great revenue growth, and by the end of the 2009 financial year we expect to have 36 converted stores," he said.

Boxer had another excellent trading year including opening five additional stores, with 14 scheduled for opening in the coming financial year, including nine Score conversions.

In Zimbabwe, TM continues to trade under exceptionally difficult economic conditions, with procurement being their biggest challenge.

"We continue to support our colleagues and hope for political and economic stability in the near future. In the current year we have impaired our remaining investment in TM of R9.1m," Badminton added.

In Australia, turnover for Franklins for the year at Aus$820.8m showed an increase of 1.7% over last year, despite the fact that two stores were sold to a franchisee early in the year.

Due to the weakening of the rand, turnover for the period at nearly R5bn showed an increase of 16.4%.

Pleased with performance Down Under

"Franklins produced an operating profit before interest of Aus$2.3 million for the year, which included profit (Aus$7.9 million) from the sale of two corporate stores to a franchisee as part of our planned strategic franchise roll-out.

We are exceptionally pleased with this result as it is underpinned by an operating profit before interest of Aus$1.2 million in the second half of the financial year. We are confident that this is the turning point for the operation," Badminton added.

"Our five refurbished stores are doing very well with a 15% uptick in turnover. The decision to invest a further Aus$50.0 million to fund the refurbishment of 30 Franklins stores will have a significant impact on sales growth over the next few years. Of this investment, Aus$20.0 million has already been remitted," he said.

The significant changes made in the Franklins business in the last three years, together with the continued rollout of the franchise business, the refurbishment of key stores and the opening of three new stores next year, provide a strong platform for earnings growth, he said.

For the year ahead, the conversion of accounting systems to SAP throughout the group will continue with the conversion of the Western Cape, Eastern Cape and KwaZulu-Natal regions, together with the corporate accounting office, now complete.

The remainder of the Pick n Pay Retail divisions are due for conversion over the next 18 months.

Strong growth expected

"Our main strategic focus areas for the coming year include the continued conversions of Score stores to Pick n Pay Family stores, enhancements to the efficiency and throughput of our new distribution centre at Longmeadow, improvements to our organisation, and further enhancements to our Fresh food offer.

"We are confident that the group will achieve an acceptable growth in headline earnings for the 2009 financial year and with the significant investments taking place, strong growth for the years thereafter," Badminton concluded.

Pick n Pay reported diluted headline earnings per share of 189.45 cents for the year ended February from 160.79 cents a year ago.

A final dividend of 118 cents per share was declared, up 10% from a year ago, making a total dividend of 149.1 cents - up 11% from a year ago.

Revenue rose to R47.5bn from R41.1bn a year ago, while turnover grew 15.4% to R45.4bn. This growth comprises 15.2% in the southern African business segment and 16.4% in Australia.

The Franklins increase in Australian dollars is 1.7%, despite the sale of two stores. Trading profit was 16.9% higher at R1.49bn, while profit for the year rose to R936.8m from R675.6m before.

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