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Bakar Jakoet

Strong financial control and tighter operating efficiency across the business has been key to our improvement in trading profit.

Chief Finance Officer’s report

Effect of the change in financial reporting calendar

The Group implemented a 52-week financial reporting calendar in February 2013, aligning external financial reporting with Group internal operational structures. Revenue and gross profit is now managed on a daily basis and aggregated into 52 trading weeks of 364 days, with the reporting period always ending on a Sunday. All other items included in profit before tax (other than those included in gross profit) are managed on a calendar month basis and are not pro-rated to days or weeks. The profit for the year therefore consists of 52 weeks of gross profit and 12 calendar months of other income and trading expenses.

As a result of this change, the 2014 annual financial period began on 4 March 2013 and ended on 2 March 2014 (364 days). This compares to the 2013 annual financial period which ran from 1 March 2012 to 3 March 2013 (368 days). The 2013 financial period therefore included four extra days of turnover and related gross profit. Other income and expenditure between the two years is, however, comparable, with both the 2014 and 2013 financial years reporting a full 12 calendar months of other income and trading expenses.

Reviewing turnover and gross profit on a comparable 364-day basis is more meaningful and as such, the results in this commentary (unless otherwise stated) are presented on a comparable pro forma basis. Refer to note 29 for more detail.

PICK N PAY STORES LIMITED
Key financial indicators

Review of operations

The Group presented an improved financial performance this year, substantively delivering on the objectives we set at the beginning of the year. Strong financial control and tighter operating efficiency across the business has been key to our improvement in trading profit. While there is still a great deal of work to be done, we are encouraged by the progress achieved to date.

The Group delivered encouraging new-store growth. However, a more challenging economic environment for consumers has inhibited like-for-like growth across the sector, and Pick n Pay has not been immune to this. Customers are facing increasing financial pressure as a result of rising fuel, electricity and other utility costs, rising interest rates and levels of household debt, and a weak rand feeding through to rising commodity prices and consumer goods price inflation. We anticipate further pressure in the short to medium term.

Fiscal control and tight overhead management remains crucial in this environment. Our plan is therefore to continue to reduce our costs and improve our efficiency. However, a customer-driven, sales-led approach remains core to our strategy. By lowering our costs, we can drive sales by investing more in the shopping trip and by focusing relentlessly on the fundamentals of good retailing – offering customers consistently good quality, service and value for money.

A growing business

The Group has a clear plan to compete strongly, strengthen and grow within the core South African market and to establish Africa as a second engine of growth. The Group opened 111 new stores during the year and closed 26 under-performing stores, adding 3.4% net new space. The total number of stores at year-end is 1 076, comprising 643 company-owned stores and 433 franchise stores, across multiple retail formats and six southern African countries. In addition 52 stores, three of which operate under the Pick n Pay brand, are operated in Zimbabwe by our associate, TM Supermarkets.

Footprint outside of South Africa

Overview of financial result

Turnover

Turnover growth of 7.7% was achieved against the backdrop of a tough trading environment, with consumer spending coming under increasing pressure from rising costs and lower confidence. Like-for-like turnover growth is 2.7%. We remain focused on our customers’ needs and will drive turnover growth by consistently improving our product offering, stock availability and customer service. There is evidence that our focus on improving the shopping trip for customers is having a positive effect, with Pick n Pay steadily closing the market share growth gap with our closest competitors. Our customer count increased by 3.2% over the year and we served our customers with more than 770 million transactions. Customers are more engaged than ever in our smart shopper loyalty programme, with the introduction of a number of enhancements over the year, including the interface with our point of sale system (loyalty points and vouchers printed on till slips), instant saver promotions and the smart shopper mobile application. Smart shopper sales participation is 62% and the rate of points’ redemption has increased by 11 percentage points to 69%.

The South Africa Division represents the majority of the Group’s operations. Despite the challenges of the trading environment, this division grew at every level. We served more customers, with higher value baskets and in more stores. Turnover was supported by 103 store openings (77 company owned and 26 franchised), across all formats and in both the Pick n Pay and Boxer brands. We are keenly focused on improving the quality of our fresh and perishable produce and our pre-packaged convenience ranges, and are seeing good results in this area. We are experiencing more growth in our smaller, convenient supermarkets, while our larger Hypermarket format remains under pressure. We have a focused plan in place for each individual Hyper and are working hard at improving the customer offer in those stores. Our general merchandise team has made good progress in rationalising and focusing our general merchandise range, which will start to have a positive impact on the business, particularly in our Hypermarkets. Our smaller clothing and liquor formats continue to perform well and make meaningful contributions to the turnover and profit growth of the business. We will introduce expanded and targeted clothing ranges into our supermarkets next year.

The Africa Division increased its segmental revenue by 27.9% over the 2014 financial year. This division has 46 stores outside South Africa and a 49% investment in 52 supermarkets in Zimbabwe. We are developing our presence outside of South Africa, which although still a relatively small part of our business, has the potential to be a second engine of growth for Pick n Pay. Pick n Pay closed its franchise business in Mauritius and Mozambique during the year, exiting territories and partnerships which were not profitable for the Group, in order to focus on more strategic opportunities. We are particularly pleased with the financial performance of our company-owned business in Zambia which continues to deliver strong trading results. TM Supermarkets opened three new supermarkets in Zimbabwe during the year bringing the total number of stores operated by our associate to 52, including three Pick n Pay stores which trade strongly under the strength of our core brand.

Gross profit

The Group has maintained the gross profit margin at 17.5%. We are pleased with the progress made across our buying and distribution channels, which has resulted in improved efficiencies and meaningful cost reductions. In particular our two central distribution centres, at Longmeadow in Gauteng and Philippi in the Western Cape, have both delivered considerable operating improvements which have significantly reduced the net cost of distribution as a percentage of turnover. We have also demonstrated improved control over waste and shrink which are well below the levels of the previous year. In addition, our new reporting platform is enabling improved gross margin management through the enhanced visibility of more timely information.

All the benefits realised have been reinvested back into the selling price of goods, as part of our strategy of investing in the shopping trip. We ran a wide range of targeted and innovative promotions during the year, aided by our greater understanding of customers through our smart shopper loyalty programme.

Other trading income