Pick n Pay is a great business, but the past few years have been challenging, and this has been reflected in our financial results. Pick n Pay is a growing business in a growing market. We’ve served more customers and sold more product this period than we did last period. However, we have delivered a disappointing result as we failed to turn those sales into sufficient profit. We have invested heavily to build a better future for Pick n Pay. These investments have yet to generate sufficient value for our customers and shareholders. We are intensely focused on improving the shopping experience for our customers and delivering better returns for our shareholders.

REVIEW OF OPERATIONS

The Group experienced a challenging trading period against a backdrop of depressed economic growth, waning consumer confidence, high levels of household cost inflation and increasing competition in the marketplace, resulting in unsatisfactory turnover growth of 7.1%. Operating profit at R808.9 million, 30.9% below the last financial period, reflects our weak trading performance. We have invested heavily in the business and we now need to ensure we deliver the benefits.

We are a scale business that is growing. The Group opened 107 stores during the period, ending with 992, consisting of 570 company owned and 422 franchise stores across multiple formats and in 8 geographies. In addition, 49 stores are operated in Zimbabwe by our associate, TM Supermarkets. Our customer count increased by 4.3% and we serviced our customers with close on 750 million transactions. More than half of South African consumers regularly shop with us (source: AMPS 2012). Close on 60% of the Group’s turnover is through smartshopper, the largest loyalty programme in South Africa. Every second our business is open, 10 smartshopper cards are swiped in our stores.

During the past 2 years, as part of our business improvement plan, we implemented centralised specialist category buying, invested in our central distribution capability and worked on improving our service and offering to our customers. We have achieved the following notable milestones in the current financial period under review:
  • The successful opening of our second major distribution centre in Philippi in the Western Cape.
  • Significant operational efficiencies achieved by taking the management of our distribution centre in Longmeadow, Johannesburg, in-house.
  • The bedding down of our category buying team, which has brought a major change in the way we develop the product offer for our customers.

The costs related to these business improvement initiatives have contributed to increased operating expenses in the financial result.

FINANCIAL REVIEW

During the review period the Group adopted a 52-week financial reporting calendar for all future annual financial periods. This change will align financial reporting with Group operational structures. As a result, the 2013 annual financial period ended on 3 March 2013 compared to 29 February 2012 in the comparative period. The effect of the additional trading days is included in the 2013 reporting period.

The Group is managed through 2 divisions, the South Africa Division and the Africa Division. The South Africa Division operates in various formats under the Pick n Pay and Boxer brands. The Africa Division is responsible for the Group’s emerging expansion into the rest of Africa and operates in Namibia, Lesotho, Swaziland, Mozambique, Mauritius, Botswana, Zimbabwe and Zambia.

Number of stores

  2012 Opened Closed Conver-  
sion  
2013  
Company owned            
Pick n Pay 374 45 (1) 2   420  
Hypermarkets 20 —  —   20  
Supermarkets 174 10 (1) 2   185  
Clothing 62 14 —  —   76  
Liquor 117 18 —  —   135  
Pharmacy 1 3 —  —   4  
Boxer 129 23 (3) 1   150  
Supercities 3 7 (1) —   9  
Superstores 96 7 —  1   104  
Hardware 13 2 —  —   15  
Liquor 8 5 (1) —   12  
Punch 9 2 (1) —   10  
Total company owned 503 68 (4) 3   570  
Franchise            
Pick n Pay            
Family 215 8 (1) (2)  220  
Score conversions 45 —  (2)  43  
Mini Market 21 1 —  1   23  
Daily 1 —  —   1  
Express 9 8 —  —   17  
Clothing 12 1 —  —   13  
Liquor 85 21 (1) —   105  
Total franchise 388 39 (2) (3)  422  
Total Group stores 891 107 (6) —   992  
African footprint 95 11 (2) —   104  
Pick n Pay company
owned
9 1 —  —   10  
Pick n Pay franchise 36 10 (1) —   45  
TM Supermarkets
associate
50 (1) —   49  

Turnover

Group turnover increased by 7.1% to R59.3 billion (2012: R55.3 billion). The increase is 6.3% if the impact of the change in reporting calendar is excluded. Inflation for the period was 5.9%. Like-for-like turnover growth was 3.0% and 107 new stores contributed 5.2% to our trading space and 3.3% to sales.

The South Africa Division, representing the majority of the Group’s operations, experienced positive growth in 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.

The Africa Division increased segmental turnover by 35.0% to R2.7 billion during the review 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 our core South African business but will continue to look for profitable growth opportunities in the rest of Africa.

Gross margin

The Group’s gross margin reduced to 17.7% from 18.0% in a highly competitive market that necessitated investment in price. A number of factors further contributed to the lower 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 were incurred to bring the management of our Longmeadow distribution centre in Gauteng in-house.
  • The Group also opened a new distribution centre in Philippi in Cape Town with the expected related initial start-up 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 profit

The trading margin decreased from 2.3% to 1.4% as a result of the reduction in gross margin and our investment in people and infrastructure.

Operating expenses increased by 11.5% compared to turnover growth of 7.1%. Apart from the business improvement costs, the following also contributed to the increase:
  • 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.
  • Occupancy costs increased in line with the Group’s expansion strategy.
  • Short-term cost increase due to the overlap of regional and centralised structures as we transition to centralised buying and administration. Increased efficiencies from the new structure will contribute to future profitability.

Employee costs were well managed, with an increase of 6.3%, especially when taking into account the increase in our store footprint.

Interest and tax

The net interest expense of R88.5 million (2012: R95.6 million) was well managed and the Group’s effective tax rate decreased from 34.9% to 31.9% due to the replacement of STC with a dividend withholding tax.

Earnings per share

Headline earnings per share (HEPS) from continuing operations decreased by 30.8% from 160.78 cents to 111.30 cents and the change in the financial reporting calendar made a positive contribution to HEPS. The additional trading days included in the 2013 result contributed 6.09 cents per share to HEPS and, if excluded, the decrease on the prior period is 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.

Financial position

The financial position of the Group as at 3 March 2013 was also impacted by the change in reporting close off date due to the changeover to a 52-week reporting calendar. During the additional days, a net cash outflow of R1.1 billion was recorded, which related mainly to the payment of trade creditors. Although cash balances were reduced, this did not have an impact on the net working capital of the Group.

When evaluating the Group’s financial position, it is more appropriate to consider the movement in net working capital in order to eliminate cut-off impacts and ensure year-on-year comparability. The decrease in net working capital during the reporting period was predominantly due to increases in inventory and trade and other receivables.

The 20% increase in inventory is a result of the following:
  • Provisioning of the new Western Cape distribution centre in Philippi and expanding our store footprint, ensuring that our customer offering is accessible and convenient.
  • Increase in imported merchandise to strengthen the customer offering in our Hypermarkets.

If these factors are taken into account our inventory levels are in line with those of the comparable period.

The increase of R240 million in trade and other receivables relates to the change in reporting cut-off and 39 new franchisee stores. Franchise receivables were well controlled, but our exposure to emerging market franchisees has resulted in some challenges.

Cash outflows during the period related to the settlement of loan funding of R250 million and capital expenditure of R1.3 billion. More than half of capital expenditure consisted of expanding our store base and improving the customer experience in existing stores.

Capital commitments to the value of R1.8 billion are planned for the next financial period. More than half will be focused on an increase in our footprint and convenience offering to the customer. We will add trading space via more than a 100 stores and improve our existing stores to ensure an improved customer experience.

Shareholder dividends

The Group maintains a dividend cover at 1.33 times headline earnings per share. The final dividend of 69.25 cents per share brings the total dividend for the year to 84.0 cents per share, 35.8% down on the prior period.

During the previous financial period, an additional dividend of 9.85 cents was declared in respect of STC no longer payable by the Group thus passing on the cash benefit to shareholders. If this is excluded, the decline in the year-on-year dividend was 30.6% in line with the decrease in headline earnings per share.

Prospects

Under the leadership of newly appointed CEO Richard Brasher, our immediate priority is improving the shopping trip for our customers. We need to deliver on our promises to our customers and have opportunities to improve the range we offer, the quality of our products and the value we give back to our customers through price and promotion.

Pick n Pay is a great business, but as a team we know that a lot of hard work lies ahead. It will be a challenging and exciting period for the Group and we look forward to the future with optimism.

Gareth Ackerman Richard van Rensburg
Chairman Chief Executive Officer
   
22 April 2013  

Dividend declarations

Pick n Pay Stores Limited – Tax reference
number: 9275/141/71/2

Number of shares in issue: 480 397 321

Notice is hereby given that the directors have declared a final gross dividend (number 90) of 69.25 cents per share out of income reserves.

The dividend declared is subject to dividend withholding tax at 15%.

There is no secondary tax on companies (STC)
to be taken into account when determining the dividend tax to withhold.

The tax payable is 10.3875 cents per share, leaving shareholders who are not exempt
from dividends tax with a net dividend of 58.8625 cents per share.

Dividend dates

The last day of trade in order to participate in the dividend (CUM dividend) will be Friday, 7 June 2013.

The shares will trade EX dividend from the commencement of business on Monday, 10 June 2013 and the record date will be Friday, 14 June 2013. The dividends will be paid on Tuesday,
18 June 2013.

Share certificates may not be dematerialised or rematerialised between Monday, 10 June 2013 and Friday, 14 June 2013, both dates inclusive.

On behalf of the Boards of directors

DE Muller
Company Secretary
 
22 April 2013