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Report to stakeholders

Chief Finance Officer's report

PICK N PAY STORES LIMITED
FINANCIAL PERFORMANCE

Turnover

Group turnover increased by 7.1% (6.3% excluding the impact of the change in financial reporting calendar).

The challenging trading period is reflected in our turnover growth. Inflation for the period was 5.9%. Like-for-like (LFL) turnover growth was 3.0% and 107 new company owned and franchise stores contributed 5.2% to our trading space and 3.3% to the turnover growth.

South Africa Division

The South Africa Division, representing the majority of the Group’s operations, experienced positive growth in the number of stores, customers and volumes, underpinning the broad appeal of the Group’s brands. Turnover was, however, negatively affected by the difficult trading environment and the transport strike during September and October 2012. The strike caused major supply chain disruption, resulting in out-of-stock positions with a consequential negative impact on turnover across all our brands.

Turnover was supported by 96 store openings (67 company owned, 29 franchised), including 10 Pick n Pay supermarkets and 23 Boxer formats. The Hypermarket format remains under pressure but is showing some improvement year-on-year. We are working hard on ensuring that the customer offering in these stores remains competitive.

Africa Division

The Africa Division increased external turnover by 31.8% during the reporting period. This division is becoming a sizable business, with store openings in Zambia, Namibia, Swaziland, Lesotho and Mauritius contributing to strong growth, albeit off a small base. The Group is focused on its core South African business but will continue to look for profitable growth opportunities in the rest of Africa.

Gross margin

• We launched a targeted promotion in the latter part of the financial period in a determined and successful effort to clear out under-performing inventory lines.
• Distribution costs are included in the Group’s gross profit. During the financial period, once-off costs of R64 million were incurred to bring in-house the management of our Longmeadow distribution centre in Gauteng.
• The Group also opened a new distribution centre in Philippi in Cape Town with the expected related initial startup costs. Our investment in the distribution channel is focused on improving product availability and freshness for our customers.

Shrinkage across the Group remained well controlled and within industry benchmarks.

Trading margin  

The trading margin decreased from 2.3% to 1.4% as a result of the reduction in gross margin as explained earlier and our investment in people and infrastructure. The Africa Division increased trading margin primarily as a result of the focus on our fresh offering to customers as well as an improved general merchandise range and availability. An increase in volumes exported from the African distribution centre has also contributed to increased profitability.

Trading expenses

Trading expenses increased by 11.5% as a result of the cost of our business improvement initiatives compared to turnover growth of 7.1%.

Employee costs

• Employee costs were well managed, with an increase of 6.3%, especially when taking into account the increase in our store footprint.
• All our customer-facing employees attended “Every Customer Every Time” training, focused on improving customer service.

Occupancy

• Occupancy costs, up by 15.2%, increased in line with the Group’s expansion strategy.
• Increases in rates and taxes also contributed to the above-inflationary increase.

Operations

• Short-term costs increased due to the overlap of regional and centralised structures as we move to centralised buying and administration. Increased efficiencies from the new structure will contribute to future profitability.
• Electricity usage is being controlled well, but in spite of efficiency measures the administered price increases, at an average of 16%, are still well above inflation.

Merchandising and administration

• The Group is South Africa’s largest acceptor of electronic tender. A significant increase in credit card sales participation is a concerning indicator that customers are supplementing household income with debt.

Tax

The Group’s effective tax rate decreased from 34.9% to 31.9% mainly due to the replacement of secondary tax on companies (STC) with a dividend withholding tax.

Earnings per share

Headline earnings per share (HEPS) from continuing operations decreased by a disappointing 30.8% from
160.8 cents to 111.3 cents.

The change in the financial reporting calendar made a positive contribution to HEPS. The additional trading days included in the 2013 result contributed
6.1 cents per share to HEPS and, if excluded, the decrease on the prior period was 34.6%.

Basic earnings per share including discontinued operations decreased by 50.6% from 233.21 cents to 115.14 cents per share as the prior period result included a non-recurring after-tax profit of R438 million on the disposal of Franklins, our discontinued Australian operation.

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