Integrated

Annual Report

2018


NAVIGATING OUR REPORTING SUITE

NAVIGATING OUR REPORTING SUITE

Our six capitals

Our ability to create long-term sustainable value for stakeholders depends on the use of various capitals within our business. The International Integrated Reporting <IR> Framework supports integrated financial reporting, and, in particular, the reporting of the Group's business model across these six forms of capital. Refer to "Our business model" on pages 20 to 21 for more information.

Financial

Human

Manufactured

Social and relationship

Intellectual

Natural

Our key stakeholders

The Group is committed to open and constructive engagement with all our stakeholders. Our business model and strategy are designed to consider and address the issues and concerns most relevant to our key stakeholders. Refer to the "Engaging with our stakeholders" section on pages 38 to 41 for more information.

Customers

Community

Employees

Suppliers

Franchisees

Shareholders

Our business acceleration pillars

The second stage of our strategic long-term plan is organised around seven business acceleration pillars. These pillars represent the material growth opportunities that can materially affect our ability to create value over the short, medium and long term. Refer to our "Strategic focus" section on pages 44 to 51 for more information.

Better for customers

A flexible and winning estate

Efficient and effective operations

Every product, every day

A winning team

Boxer–
a national brand

Rest of Africa – a second engine of growth


Previous

Annual financial result


The summarised financial result is presented on a restated and normalised basis.

SUMMARY OF FINANCIAL PERFORMANCE

    As per 
annual
financial 
statements 
25 February 
2018 
Rm 		 % of
turnover		 %
change		   Normalised 
26 February 
2017 
Rm 		 % of
turnover
  Revenue 83 504.8    5.5   79 134.6   
  Turnover
Turnover

Turnover growth of 5.3%, with like-for-like growth of 2.2%, reflects the tough trading environment over the year and substantially lower levels of inflation.

 		81 560.1    5.3   77 486.1   
  Cost of merchandise sold (66 309.8)   5.2   (63 029.5)  
  Gross profit
Gross profit

Greater price competitiveness was achieved without any sacrifice in margin through a combination of better buying and strong cost discipline.

 		15 250.3  18.7 5.5   14 456.6  18.7
  Other trading income
Other trading income

Other trading income includes income from value-added services, which grew 30.1% year on year.

 		1 760.6  2.2 15.6   1 522.4  2.0
      Franchise fee income 400.1  0.5 14.4   349.8  0.5
      Operating lease income 446.1  0.6 29.2   345.3  0.4
      Commissions, dividends received and other income 914.4  1.1 10.5   827.3  1.1
  Trading expenses (15 191.0) 18.6 6.7   (14 243.4) 18.4
       Employee costs
Employee costs

Excluding the cost of the VSP of R250.0 million, employee costs grew just 0.4% year-on-year, falling to 7.9% of turnover (FY17: 8.3%).

 		(6 688.7) 8.2 4.3   (6 414.0) 8.3
       Occupancy
Occupancy costs

Occupancy costs up 7.2% on a like-for-like basis, driven by above-inflation increases in rates and security costs, and the ongoing addition of strategic head leases to protect the tenancy of key franchise sites.

 		(3 086.6) 3.8 15.2   (2 678.9) 3.5
      Operations (3 178.8) 3.9 7.3   (2 961.7) 3.8
      Merchandising and administration (2 236.9) 2.7 2.2   (2 188.8) 2.8
  Trading profit
Trading profit

Trading profit margin unchanged at 2.2%. Excluding the once-off cost of the VSP, trading profit margin improved to 2.5%, an indication of the Group’s sustainable profit performance.

 		1 819.9  2.2 4.9   1 735.6  2.2
  Finance income 184.1  0.2 46.0   126.1  0.2
  Finance costs
Finance costs

The Group’s investment in capital programmes has resulted in increased gearing over the year and an increased interest bill.

 		(331.2) 0.4 51.5   (218.6) 0.3
  Share of associate's income 116.3  0.1 45.0   80.2  0.1
  Profit before tax before capital items 1 789.1  2.2 3.8   1 723.3  2.2
  Losses on capital items (21.0)       (46.3)  
  Profit before tax 1 768.1  2.2 5.4   1 677.0  2.2
  Tax (471.8) 0.6 2.3   (461.0) 0.6
  Profit for the period 1 296.3  1.6 6.6   1 216.0  1.6

    Cents   % change Cents  
  Earnings per share          
      Basic 273.64   9.0 250.98  
      Diluted 268.33   9.7 244.65  
      Headline 276.98   7.1 258.65  
      Diluted headline 271.61   7.7 252.13  
SUMMARY OF FINANCIAL POSITION
  As per annual financial statements As at 
25 February 
2018 
Rm 		   Restated 
As at 
26 February 
2017 
Rm 
  ASSETS          
  Non-current assets          
       Property, plant and equipment
Property, plant and equipment

The increase in the Group's assets reflects its capital investment programme, in particular its ongoing investment in new and refurbished stores and its growing centralised supply chain capacity.

 		 6 054.4     5 583.6 
      Intangible assets  991.3     984.3 
      Operating lease assets  227.3     198.3 
      Financial instruments at fair value through profit or loss  25.7     13.7 
      Investment in associate  365.6     309.7 
      Loans  79.3     85.1 
      Retirement scheme assets  97.6     95.3 
      Deferred tax assets  194.8     218.0 
      Trade and other receivables  105.4     145.2 
8 141.4     7 633.2 
  Current assets          
       Inventory
Inventory

Removing the impact of new stores and inflation, the like-for-like inventory value is down 5.0% year on year.

 		 5 963.7     5 684.0 
      Trade and other receivables  3 529.1     3 299.9 
      Cash and cash equivalents  1 129.1     961.9 
10 621.9     9 945.8 
  Non-current asset held for sale
Non-current asset held for sale

Land sold after year-end during March 2018.

 		 217.2     212.8 
  Total assets  18 980.5     17 791.8 
  EQUITY AND LIABILITIES          
  Equity          
      Share capital  6.0     6.0 
      Treasury shares  (863.4)    (554.3)
      Retained earnings  4 951.7     4 428.5 
      Foreign currency translation reserve  (70.7)    (24.5)
  Total equity
Total equity

The Group delivered return on capital employed of 32.6% (FY17: 32.3%) against a weighted average cost of capital of 12.0%.

 		 4 023.6     3 855.7 
  Non-current liabilities          
      Borrowings  79.5     84.0 
      Operating lease liabilities  1 571.6     1 398.6 
      Deferred tax liabilities  13.7     14.6 
1 664.8     1 497.2 
  Current liabilities          
      Trade and other payables  10 820.6     10 490.2 
      Bank overnight borrowings  1 800.0     1 800.0 
       Current borrowings
Current borrowings

The Group raised R400.0 million of three-month debt to take advantage of competitive interest rates, which has eased overnight liquidity.

 		 449.3     49.2 
      Current tax liabilities  213.7     87.8 
      Derivative financial instruments  8.5     11.7 
13 292.1     12 438.9 
  Total equity and liabilities  18 980.5     17 791.8 
  Number of ordinary shares in issue – thousands  488 450.3     488 450.3 
  Weighted average number of ordinary shares in issue – thousands  473 717.3     482 237.5 
  Diluted weighted average number of ordinary shares in issue – thousands  483 091.1     494 709.6 
  Net asset value – cents per share (property value based on directors' valuation) 966.2     922.0 

MODERNISATION OF PICK N PAY’S CONTROL STRUCTURE

The Group eliminated its pyramid control structure in the prior year through the unbundling of the Pick n Pay Holdings Limited RF Group. The simplified Group structure is more cost-effective in administration and improves the Group’s appeal to investors.

The unbundling transaction had no impact on trading profit or headline earnings last year; however, it resulted in a number of material non-recurring movements on certain individual categories of other trading income and trading expenses, as detailed below:

Summary of non-recurring items included in trading profit in 2017:

    Normalised 
26 February 
2017 
Rm 		 % of 
turnover 		 Non-recurring 
items 
26 February 
2017 
Rm 		 As per 
annual 
financial 
statements 
26 February 
2017 
Rm 
  Revenue   79 134.6  (412.3) 79 546.9 
  Turnover   77 486.1  –  77 486.1 
  Cost of merchandise sold  (63 029.5) –  (63 029.5)
  Gross profit   14 456.6  18.7  14 456.6 
  Other trading income  1 522.4  2.0  (412.3) 1 934.7 
      Dividend in specie  –  (412.3) 412.3 
      Franchise fee income  349.8  0.5  –  349.8 
      Operating lease income  345.3  0.4  –  345.3 
      Commissions, dividends received and other income  827.3  1.1  –  827.3 
  Trading expenses   (14 243.4) 18.4  412.3  (14 655.7)
      Employee costs  (6 414.0) 8.3  205.8  (6 619.8)
      Occupancy  (2 678.9) 3.5  –  (2 678.9)
      Operations  (2 961.7) 3.8  –  (2 961.7)
      Merchandising and administration  (2 188.8) 2.8  206.5  (2 395.3)
  Trading profit   1 735.6  2.2  –  1 735.6 

Other trading income – included a dividend in specie of R412.3 million, representing the value of the Pick n Pay Stores Limited shares (now held as treasury shares) received by the Group on the unbundling of Pick n Pay Holdings Limited RF (PWK).

Employee costs – the Group operates an employee share incentive scheme where eligible employees were granted share options in PWK. These share options were cancelled and replaced with Pick n Pay Stores Limited share options, in terms of the shareholder approval received at the general meeting held on 25 July 2016.

Employee costs included R205.8 million of share-based payment expenses related to the increase in the market value of PWK share options prior to the unbundling, as well as the cancellation and replacement cost of these options.

Merchandising and administration costs – included a net fair value loss of R206.5 million in respect of the Group’s investment in PWK. This fair value movement was as a result of the increased market value of PWK shares prior to the unbundling, and the subsequent write-off of the investment on the receipt of the dividend in specie distribution.