Investment to weigh on Pick n Pay profit

Total sales growth for the six months ended February was at 8.7%, on the back of rising food inflation and more customers signing up to its smart shopper loyalty programme, which now has over five million members.

Turnover growth for the year however was at 8.1%, lagging behind analysts' expectations.

This is not the first time the retailer has disappointed.

The Cape Town-based company has faced a barrage of criticism over the last two years over its high cost base, outdated IT systems and labour issues that have seen it lose market share to its peers.

The group has been under further pressure to step up its game with the entrance of US giant Wal-Mart into the local market through its 51% stake in Massmart (MSM).

Last October Pick n Pay reported a 40% decline in first-half profits but said it was making a concerted effort to change the model in which it operated.

The company has made sizable investments in its loyalty programme, centralised distribution system and a specialist category buying function to improve operating efficiencies.

Chris Gilmour, analyst at Absa Asset Management Private Clients said that Pick n Pay's problems were deep-seated and would take years to resolve properly.

"The company took its eye off the ball many years ago in a number of areas, notably in general merchandising, where it stopped the rollout of its Hypermarket chain. They also made the cardinal error of returning to Australia, a move, in our opinion, not based on good business principles," he commented.

Pick n Pay finally exited the Australian market through its long-delayed R1.2 billion sale of Franklins to Sydney-based Metcash last September.

Chairman Gareth Ackerman said the decision to exit its Australian investment was a difficult one, but it was clear that Franklins had lacked the significant scale needed to compete effectively in the market.

The move was largely welcomed as it allows the group to get its house in order by freeing it up to pay down debt, expand its distribution network and aid its store growth.

But Gilmour pointed out that the group also ignored the global trend towards centralised distribution, and as a result was now "running a marathon at a sprinter's pace" in order to make up for lost time.

"We believe it will be 2014 at the earliest before any meaningful sustained improvements are manifest in the group," he cautioned.

Adding to Pick n Pay's lengthy "to-do list" is the search for a new head following the abrupt departure of CEO Nick Badminton earlier this year.

Nedcor Securities analyst Syd Vianello said that while Badminton had not come across as a dynamic person, he "did a helluva lot of good while he was there [at Pick n Pay].

"They will need to find a hard-as-nails CEO who really understands the food retail industry," he advised.

Pick n Pay said its search for a new CEO would include internal candidates and external candidates, both local and international.

The company has guided that headline earnings per share (HEPS) and diluted HEPS from continuing operations would fall 10%-20% for the year to February, with earnings per share (EPS) and diluted EPS increasing 35%-45% after accounting for the profit from the sale of Franklins.

The I-Net Bridge consensus forecast was for diluted headline earnings per share of 161.3 cents and a dividend of 123.8 cents per share.

Pick n Pay's results are due on Wednesday 18 April.