Deputy Chief Executive and Chief Finance Officers’ report

 

 

OVERVIEW 

A great deal of focus and resources has been invested in an extensive transformation process over the last three years, requiring an unwavering commitment from the Pick n Pay team. We have faced a number of challenges and risks, but in a relatively short period have made significant strides in the implementation of our strategy and in renewing Pick n Pay for the future.

The considerable progress made to date includes the successful enterprise-wide implementation of SAP, the introduction of centralised distribution, our increased and improved footprint in the lower LSM market, the consolidation of our three inland administrative regions, the implementation of specialised category buying and the introduction of South Africa’s largest retail loyalty programme, Smartshopper.

These initiatives, although absolutely imperative to the long-term sustainability of the Group, have come with significant investment costs. These costs have negatively impacted the financial performance of the Group over the last few years. The 2012 financial year is no different, with significant investment costs once again curtailing profit growth. However, it is without doubt a year of two distinct halves. A particularly tough interim result saw our trading profit from continuing operations fall by 31.7% for the first half of the year, but we were able to achieve a marked improvement in the second half, with trading profit for the six months to 29 February increasing by 11.2% on the same period last year. We are encouraged by the performance in the second half and believe that there are now clear indications that our investments over the last few years are starting to yield real benefits.

STRATEGIC ACHIEVEMENTS IN 2012 

The Group has taken some significant steps forward in the 2012 financial year, which have enabled us to bed down the key elements of our strategy and focus on our core operations:

Smartshopper – we launched our loyalty programme in March 2011. Customer acceptance of the programme has far exceeded our expectations and we currently have in excess of five million active cardholders on the programme, against a first year target of three million. Smartshopper sales currently make up 60% of our total sales and 33% of all our baskets, with a Smartshopper basket growing at a significantly higher rate than a non-Smartshopper basket. We have been able to show our Smartshoppers real benefits, providing R350 million in savings over the year. It will take a number of years before we realise the full benefits of the programme, however we believe the encouraging growth in turnover this year is due in part to Smartshopper. Set-up costs have impacted the earnings of the Group, but we expect the programme to drive turnover growth now and into the future and generate additional value as we understand our customers better and can market more effectively to them.

Specialised category buying – we have successfully completed the transformation of our regional buying teams into a single, specialised category buying division. This is a complete overhaul of buying at Pick n Pay and marks a significant shift in the way in which we engage with suppliers. The division has already delivered improved performance through the reduced cost of goods and a scientific approach to ranging and pricing. With specialised category buying we will be better placed in negotiations with suppliers, will rationalise our product range and will optimise our product display. Our key focus is on delivering an improved selection of high quality products and better value to customers.

Centralised distribution – we are currently moving 1.6 million cases a week through Longmeadow, our central distribution centre in Gauteng, and 36% of total groceries are now centrally distributed. There have been pleasing operational improvements at Longmeadow, which include reduced labour and distribution costs per case on last year. We continue to focus on this facility to ensure that our supply chain is fully optimised. We opened our new Western Cape distribution centre in May 2012 which will benefit from our learnings at Longmeadow.

Labour costs and expense control – general expense control remains a high priority and management is focused on eliminating inefficiencies, improving productivity and reducing controllable costs, especially in light of the extraordinary increases in property rates and electricity tariffs over the year. In December 2011 we negotiated a new agreement with the union, which affords us much more flexibility and will enable us to staff our stores more efficiently. We expect the benefits of this agreement to start flowing in the 2013 financial year.

PnP on Nicol – our flagship “green” store in Sandton has traded exceptionally well over the last year and illustrates that there is significant opportunity for Pick n Pay in the upper end of the market. A number of successful innovations from this store were incorporated into three other stores this year and we plan to roll out more than 10 of these type of stores over the next three to five years.

Franklins, Australia – in September 2011, after a lengthy dispute with the Australian Competition and Consumer Commission, we sold our Franklins business to Metcash Limited for R1.2 billion, net of fees. We are now able to focus our teams and capital entirely on our core southern African retail operations.

FINANCIAL REVIEW

Significant investment costs had an impact on profit growth for the year, most notably the upfront launch costs of Smartshopper, the implementation of specialist category buying and the continued investment in our central distribution capability, all of which will improve future operating efficiencies and enable us to serve our customers better.

There has been a marked improvement in the second half performance, with the first clear signs that the business is starting to reap some rewards from the transformation work done to date.

Franklins is disclosed as a discontinued operation and its operating results to end September 2011 and the subsequent profit on sale of the business are excluded from the results reported below.

 

FINANCIAL HIGHLIGHTS - PICK N PAY STORES LIMITED


 

6 months to August 2011 

6 months to February 2012 

12 months to February 2012 

   

Rm 

% growth 

Rm 

% growth 

Rm 

% growth 

 
 

Turnover 

26 723.2 

7.6 

28 607.3 

8.6 

55 330.5 

8.1 

 
 

Trading profit 

492.2 

(31.7)

775.3 

11.2 

1 267.5 

(10.6)

 

EBITDA  

882.4 

(17.8)

1 191.3 

9.6 

2 073.7 

(4.0)

 

Cents 

% growth 

Cents 

% growth 

Cents 

% growth 

 

Headline earnings per share 

54.73 

(39.3)

105.98 

6.7 

160.78 

(15.1)

 

Dividend per share  

22.50 
Interim 

(39.2)

108.35 
Final 

2.7 

130.85 
Total 

(8.2)

 

Group turnover at R55.3 billion for the year is 8.1% above last year (8.6% for the six months ended 29 February 2012), with pleasing like-for-like growth. This turnover growth is encouraging in a highly competitive environment and is the result of a number of factors, including the positive effect of our Smartshopper programme. While our own internal selling price inflation remains below CPI, South African consumers are facing inflationary increases across the board, which when combined with continued economic uncertainty is leading them to exercise caution in their spending.

Gross profit margin for the year is 18.0% (2011: 17.8%). This improvement in margin is due to the initial benefits of specialised category buying, which more than offsets the cost of the Smartshopper loyalty points. We believe that we will be able to strengthen margins further over the coming years while maintaining our competitive price position through further category buying and supply chain improvements.

Trading profit growth in the six months to February 2012 is 11.2% up on the same period last year, a considerable improvement on the first half performance. Trading profit for the year of R1 267.5 million (2011: R1 417.7 million), at a margin of 2.3% (2011: 2.8%) is 10.6% down on last year, most significantly due to costs relating to our strategic transformation initiatives. Our labour cost has been well controlled and with our new flexible labour agreement, there is significant potential for improvement.

There has been material cost inflation in our business, most significantly with electricity, rates and fuel, and as such management continues to focus on general expense control and improving productivity.

EBITDA (earnings before interest, tax, depreciation and amortisation) is up 9.6% for the second six-month trading period, but is down 4.0% for the year to R2 073.7 million. This illustrates how our operations continue to generate strong cash returns with a comfortable coverage of tax and interest.

Net cash from operating activities at R1 558.8 million is up from R3.5 million last year, largely due to a R1.3 billion turnaround in cash generated from working capital. There have been a number of improvements in working capital management and we are focused, in particular, on reducing and managing optimum stock levels in store.

We are pleased with the progress made in this area, with like-for-like stockholdings reducing by 5.3% on last year. We continue to invest in our business and spent R1.8 billion on new stores and refurbishments during the year.

Headline earnings per share for the six months to 29 February 2012 is up 6.7% on the same period last year, to 105.98 cents per share. Headline earnings per share for the year is down 15.1% to 160.78 cents per share.

The final dividend per share of 108.35 cents for Pick n Pay Stores Limited and 52.57 cents for Pick n Pay Holdings Limited includes an additional amount to be paid to shareholders in respect of the 10% secondary tax on companies (STC) no longer payable by the Group. This brings the total dividend per share for the year to 130.85 cents for Pick n Pay Stores Limited (8.2% down on last year) and 63.48 cents for Pick n Pay Holdings Limited (8.4% down on last year).

The Group intends to maintain its dividend cover at 1.33, however with the additional dividend declared to shareholders referred to above; the dividend cover for the current year is 1.23 times.