Pick n Pay showing signs of recovery

But Pick n Pay CEO Nick Badminton had warned that results would get worse before they got better. The retailer is in the midst of the most radical restructuring in its 44-year history. Now a more upbeat Badminton notes: "I am hoping to see a significant improvement in the second half of the year."

Not obvious at first glance, signs of a recovery are already there. "There was an improvement in our gross margin," says Badminton. He explains that the increase was masked by costs incurred in converting from a decentralised to a centralised buying function aimed at eliminating costly duplication of product lines.

But the biggest hit to Pick n Pay's profit came from the costs of launching its Smart Shopper customer loyalty card. This accounted for most of the 13.7% surge in operating costs, which cut net operating margin from an already low 2.7% in February to 1.8%. "A lot of the [Smart Shopper] expenses will not recur in the second six months," Badminton says.

He is satisfied with early results from the loyalty programme, which now has over 4m active users. He says Smart Shopper boosted sales by between 3% and 3.5% compared with the first half of last year. So the card accounts for about R45 out of every R100 of the retailer's R1,86bn (7.4%) increase in sales. The rise in sales also represented the first indication in many years that Pick n Pay has reversed the erosion of its market share, Badminton notes.

Also positive was a strong recovery in its cash flow, which swung from a negative R486m in the first half of last year to a positive R906m in the latest six months. Another big positive for the retailer was the long-awaited sale of its loss-making Australian operation, Franklins. Though a cloud hangs over the deal in the form of an appeal by Australia's competition authority against a positive court ruling on the sale, Badminton believes the appeal has little chance of success. Half of the R1,3bn from the sale has been repatriated to SA.

As an investment Pick n Pay involves faith in management's ability to achieve its restructuring objectives by applying proven, modern retailing methods. The market appears to believe it can do so. Far from greeting Pick n Pay's latest results with a wave of selling, investors drove the share price up 7% within three days of their release. In the process the share outpaced the 3% rise in the all share index.

Analysts are also optimistic. Of the 12 polled by I-Net Bridge the mean forecast is for Pick n Pay's HEPS to lift 16% in the second half of this financial year compared with last year, followed by increases of 39% and 24% in the next two years.

Investors bent on food retailing do have other choices. Shoprite, with its superb record, is one, while Spar represents another solid alternative. But a comment from Warren Buffett appears apt: "A great investment opportunity occurs when a marvellous business encounters a one-time huge, but solvable problem."

Source: Financial Mail