Review of operations Key financial indicators
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52 weeks 28 February 2016 |
52 weeks** 1 March 2015 |
% change |
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Turnover |
R72.4 billion |
R66.9 billion |
8.2 |
|
Gross profit margin |
17.9% |
17.8% |
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Other trading income |
R971.3 million |
R782.9 million |
24.1 |
|
Trading expenses margin |
17.2% |
17.2% |
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Trading profit |
R1 516.3 million |
R1 240.1 million |
22.3 |
|
Trading profit margin |
2.1% |
1.9% |
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Profit before tax |
R1 473.5 million |
R1 205.2 million |
22.3 |
|
Profit before tax margin |
2.0% |
1.8% |
||
Profit for the period |
R1 065.4 million |
R861.7 million |
23.6 |
|
Basic earnings per share |
219.11 cents |
178.79 cents |
22.5 |
|
Headline earnings per share* |
224.04 cents |
177.26 cents |
26.4 |
|
Total annual dividend per share |
149.40 cents |
118.10 cents |
26.5 |
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*HEPS excludes capital profits and losses on the disposal and impairment of assets, which accounts for the difference in the year-on-year increase between HEPS and basic EPS. |
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Result summary
The Group delivered a good performance in 2016. The strongest turnover growth since 2010, an improved gross profit margin, sound expense control and greater operating efficiency all contributed to a further increase in underlying trading margin. The 26.4% increase in headline earnings per share reflects improvement across the business, and progress in executing the Group’s three-stage turnaround strategy.
Group turnover growth of 8.2% for the year is a significant improvement on the 6.1% delivered in 2015. Both like-for-like turnover growth at 3.8% (2015: 3.6%) and the contribution from new stores of 4.4% (2015: 2.5%) were stronger than in the previous year. On a constant currency basis, the top-line momentum achieved by the Group inthe first half of the financial year was largely maintained in the second half, with Group turnover increasing 8.6%, and like-for-like growth of 4.1%.
In an increasingly challenging economic environment in South Africa, a sustained drought, weaker rand, accelerating food inflation, higher interest rates and increasing costs of energy and other utilities have placed added pressure on consumers. The Group has continued to support customers through meaningful price investment, restricting its selling price inflation to 3.1% over the year, below CPI Food inflation of 5.3%.
Gross profit margin improved from 17.8% to 17.9% through further operational efficiency and cost effectiveness across the procurement and supply chain channel.
The 24.1% increase in other trading income demonstrates the Group’s commitment to broadening and improving its customer offer. Income from value-added services and other commissions increased by 35.0%.
Tighter control over capital and overhead expenditure remains a key priority. The like-for-like increase in trading expenses was contained at 5.0%, notwithstanding above-inflation increases in electricity, utility and security costs.
Effective working capital management and stronger cash balances over the year contributed to the 5.9% reduction in net finance charges, despite rising interest rates and increased capital expenditure on opening and refurbishing stores, which had an impact in the second half of theyear.
The result achieved in 2016 reflects the core principle of the Group’s long-term strategic plan that its turnaround must be customer-led as well as cost driven. The underlying improvement in thetrading profit margin from 1.9% in 2015 to 2.1% in 2016 demonstrates that Stage 2 of its plan – Changing the Trajectory of Pick n Pay – is delivering.
OPERATIONAL REVIEW
We measure our progress over the year against the Group’s seven strategic business acceleration pillars:
Better for customers
Progress achieved by the Group in improving the customer shopping experience resulted in positive like-for-like volume growth for the first time in a number of years.
The Group continued to deliver on its commitment to competitive prices and promotions, doubling the size of its Brand Match campaign to include 2000 branded-products, strengthening its Smart Shopper loyalty programme and running a number of strong promotions, including a successful 48th Birthday promotion, a fun and engaging Stikeez campaign, and a “Black Friday” campaign which delivered the strongest trading day in the Group’s history.
Brand Match continues to build confidence in the keenness of our pricing, with a high percentage of zero and low value coupons issued to customers. An increase in the proportion of coupons actually redeemed indicates the growing appeal of the Brand Match programme in difficult economic times.
Smart Shopper is South Africa’s favourite loyalty programme (Sunday Times Top Brands Awards) and with 10.7 million Smart Shoppers, a Smart Shopper card is swiped over 725 000 times a day in our stores. The Group rewarded its loyal Smart Shoppers with more savings than ever before, with 7.2 million personalised vouchers redeemed under the “Just for You” campaign. In addition, we increased the size of our “Instant Savings” campaign, enabling customers to earn an instant 10% savings off hundreds of products in-store and added a number of new and exciting partners to our “Partner Programme”.
The Group strengthened and streamlined its product range by completing its programme of product category reviews, and implementing detailed planograms to display products on shelf more effectively and consistently. This has improved replenishment and product availability.
The Group is expanding, improving and refreshing its private label range. More than 250 new products were introduced this year, with a focus on convenient, pre-prepared value-added products. More than 650 products were re-launched with newly designed packaging. OurNext Generation stores feature expanded private label ranges and have grown participation of these products.
Both Pick n Pay and Boxer delivered double digit growth in sales of value-added services, with income from pre-paid electricity sales and third-party bill payments up 57%, and income from financial services up 42%.
A flexible and winning estate
The Group continued its programme to improve the breadth and quality of its store estate. It opened 175 new stores, contributing 4.4% to turnover growth. It refurbished 40 stores, including 28 in the second half of the year. In a number of cases, new stores brought Pick n Pay and Boxer to communities for the first time. These included Emoyeni in the North West, Hoopstad in the Free State, Sedgefield in the Eastern Cape and Sebokeng in Gauteng.
Customers are increasingly seeking convenience through smaller stores, neighbourhood locations, value-added products and more flexible opening hours. The Group is focused on growth in this market, and opened 46 new convenience stores in the year under the Pick n Pay Local and Express formats.
An increasingly centralised supply chain and lower cost operating model is expanding the range of locations in which the Group can successfully operate its convenience formats, which now numbers more than 100 stores across the Group.
Improving the performance of the Hypermarket division remains a key priority for the Group. Our refurbished hypermarket stores are delivering stronger sales from less space, and are finding innovative alternative uses for freed-up space, including through rentals to other operators and conversion of space to other uses such as fulfilment of online grocery orders.
The Group opened 33 clothing stores and 55 new liquor stores over the year, both on an owned and franchise basis. These divisions are becoming increasingly strong profit contributors to the Group, particularly our clothing division which is delighting customers with high-quality clothing for the whole family at exceptional value.
Pick n Pay added 59 net new franchise stores over the year, building on the leading franchise model in South Africa. Our franchise operation provides exceptional opportunities for entrepreneurs to create and build successful businesses. Our franchise partners are a valued part of the Group, enhancing the scale, expertise and passion of our business. Issues to franchisees increased over the year and bad debts were reduced.
In February 2016, in partnership with the Gauteng Administration, the Group piloted its first “Spaza-to-Store” conversion in Diepkloof Soweto. The project has given an existing spaza shop owner access to Pick n Pay’s merchandise, business systems, supply chain and distribution network, together with management advice and mentoring. This is a pilot programme in its early stages, but has the potential to be another route through which small traders can become fully fledged entrepreneurs.
Turnover growth from Pick n Pay Online accelerated to 38% over the year, with a stronger range and a substantial improvement in product availability. The team is particularly pleased with the growth in demand from its “business to business” customers. The online business in the Western Cape has benefited from the dedicated picking warehouse established at the Brackenfell Hypermarket last year, and the Group will look to invest in a similar solution in the Gauteng region of South Africa, towards the end of this year.
Efficient and effective operations
The Group’s Next Generation stores bring together improvements in store design, space allocation, product range, store operations, product replenishment and customer service. Following the successful launch of its first three Next Generation stores in the first half of the year, Pickn Pay added a further 20 Next Generation stores in the second half, through new stores and refurbishments. In addition, Boxer added its first three Next Generation stores during the year. The Group is encouraged by the operational efficiencies being achieved in these stores, which have improved ratios of trading space to back-up receiving and storage areas, resulting in lower stock holding and less waste.
Every product, every day
The Group added 241 suppliers to its centralised distribution channel this year, increasing the total centralisation of supply from 46% last year to 56% at February 2016. The Western Cape region, serviced by the Philippi distribution centre is at 68% centralisation (80% on groceries), with the Inland Region, serviced by the Longmeadow distribution centre at 62% (69% on groceries). The increase in centralisation has improved operating efficiency and lowered the cost per case delivered, both in groceries and perishables. Volumes issued from Pick n Pay distribution centres were up 33% on last year, contributing to a 3.4 percentage point improvement in on-shelf availability in our owned stores, which now stands at 96%. The Group’s fresh distribution centre at Philippi in the Western Cape will open in September 2016, replacing its current facility next to Cape Town International Airport, which will substantially increase the fresh distribution capacity in the region.
The Group is currently looking at opportunities to grow its central distribution capacity in KwaZulu-Natal and the Eastern Cape.
A winning team
The Group created 4500 new jobs this year, mainly through its new store opening programme. The Group increased its investment in skills development and training over the year, with 46000 training courses reaching 40% of our staff. New management structures were implemented in all our new Next Generation stores to improve customer service and the quality and availability of fresh produce. These structures will be rolled out over time to all stores. The Group’s new performance management system, introduced for senior managers last year, has been extended to all junior managers. It will ensure that staff are recognised and rewarded for making a positive difference to customers. More than 1200 support office staff went “Back to the Shop Floor” for three days this year, refreshing their understanding of store operations and the importance of putting the customer first. Pick n Pay’s commitment to building a diverse workforce was recognised by South Africa’s Department of Labour at its Excellence in Employment Equity Awards, where Pick n Pay was recognised as the overall private sector winner for transformation in the workplace.
Boxer – a national brand
Boxer delivered good growth both in turnover and profit, despite the increasing economic challenges faced by its customers. Sound gross margin management and tight expense control was central to this improved performance, at a time when the business supported its customers with much needed investment in the price of basic commodities.
Boxer opened 24 new stores this year across its range of formats, including three Next Generation stores. These bring a fresh layout to stores, with a focus on strengthening the fresh meat and grocery offer. Boxer opened its first store in the Western Cape in November 2015, serviced by Pickn Pay’s Philippi distribution centre. This has established Boxer as a national brand. The store, situated at Nonkqubela station, Khayelitsha has exceeded expectations and the team is confident of the opportunity to grow the Boxer brand in the region.
Rest of Africa – second engine of growth
Segmental revenue for the Rest of Africa division was up 15.9% in constant currency terms, with like-for-like revenue growth of 4.4%. Local currency weakness in Zambia had a negative impact on growth year-on-year, with reported segmental revenues up 8.8% on translation, with negative like-for-like revenue growth of 2.2%. Profit before tax for the Rest of Africa division was up 19.6% on last year.
The Rest of Africa segment result was supported by a stronger franchise performance in Botswana and Swaziland and an improved trading result from TM Supermarkets (TM) in Zimbabwe, notwithstanding the challenging trading conditions in the region. The TM result was underpinned by its ongoing refurbishment programme, with encouraging results from its rebranded Pick n Pay supermarkets. The Group has 57 stores in the region, 14 of which now trade as Pick n Pay. TM was recognised with a number of awards from the Confederation of Zimbabwean Retailers during the year, including the Best Retail Branch Network and the Consumer Choice award as Zimbabwe’s Supermarket of theyear.
The performance of the Rest of Africa division was negatively impacted by adverse trading conditions in Zambia, reflecting the country’s energy crisis, job losses in the copper mining belt, drought and a rapidly depreciating currency. Low consumer confidence resulted in slower demand over the year, although the division delivered an improved trading performance in the second half of the year.
The Group opened 14 new stores in its Rest of Africa division during the year, one in Botswana, eight in Namibia, one in Zambia and four in Zimbabwe. The Group remains confident of the long-term prospects in all of these regions and will continue to look for opportunities to grow its footprint next year, including opening its first stores in Ghana by the end of 2017.
Pick n Pay announces plan to enter Nigeria
A key part of the Group’s strategy is to establish a second engine of growth in markets in the rest of Africa. The Group has examined the opportunity in Nigeria in detail, given the opportunity for long-term growth in that market. Following extensive on-the-ground market and consumer research over the past two years, the Group will partner with Nigeria Stock Exchange-listed AG Leventis to enter the Nigerian market. AG Leventis has nearly 90 years’ trading experience in the country, with substantial expertise in the FMCG, motor vehicle, supply chain logistics and real estate sectors, and notable FMCG capabilities through Leventis Foods. Pick n Pay will hold 51%of the operation, which will roll out a combination of large and smaller formats to meet consumer needs in Nigeria, offering ranges tailored to local customer needs. The Group’s African expansion, including its entrance into Nigeria, will continue in a deliberate, planned, and unhurried way, without putting the business under undue risk.
DETAILED FINANCIAL REVIEW
The 2016 audited Group annual financial statements include certain reclassifications and restatements. These had no impact on reported earnings for the current or prior period. Please refer to note 10 of the summarised audited Group annual financial statements for further information.
Turnover
Group turnover at R72.4 billion, was up 8.2% on last year. On a constant currency basis, Group turnover was up 8.6% for the year, with currency weakness in operations outside South Africa impacting reported turnover growth specifically in the second half of the year. Greater business efficiency, supported by strong gross margin management, and a network of effective local suppliers enabled the Group to bear down on inflation, keeping price increases to 3.1% over the year, compared to CPI Food inflation of 5.3%.
This performance is against the back-drop of a challenging trading environment and falling consumer confidence. Customers are shopping more frequently for smaller baskets. This is reflected in an increase of 7.0% in customer transactions, at a time when the growth in basket value was 0.9%.
Gross profit
Gross profit increased by 8.6% to R12.9 billion. The gross profit margin increased by 0.1 percentage points to 17.9% of turnover, a solid margin performance at a time of significant price investment. It has been made possible through effective margin management from all divisions in the Group. The Boxer team in particular demonstrated improved gross margin management in a tough environment, balancing substantial price investment in basic commodities with stronger participation from value-added departments such as butchery, bakery and deli.
Other trading income
Other trading income increased by 24.1% to R971.3 million.
Franchise fee income increased 7.6% to R316.7 million, supported by a net increase of 59 franchise stores and an improved franchise turnover performance.
Operating lease income increased 33.1% to R329.1 million, and at 0.5% of turnover, is 0.1 percentage points ahead of last year. The Group added a number of strategic head leases to its property portfolio, which boosted rentals received. The related operating lease expenses are included within occupancy costs.
Commissions and other income increased by 35.0% to R325.5 million, as a result of solid growth in value-added service products, including cellular, pre-paid electricity, third-party bill payments, travel, ticketing and financial services. This progress was particularly notable in view of the fact that the substantial launch commissions earned on the introduction of the sale of iTunes vouchers in the prior year were not repeated this year. Customer advocacy for these value-added services is steadily increasing, in both Pick n Pay and Boxer, and we are confident that this remains an exciting growth opportunity for the Group.
Trading expenses
Trading expenses at R12.4 billion were up 8.1%, and at 17.2% of turnover, were in line with last year. The increase in like-for-like trading expenses was contained at 5.0%, notwithstanding the increase in the cost of electricity and utilities.
Employee costs increased 6.8% to R6.1 billion, and at 8.4% of turnover, 0.1 percentage points better than last year. This improved performance has been driven by store operations, where savings are being achieved through improved productivity and efficiency. The like-for-like increase of 4.7% against an annual wage rate increase which was ahead of CPI, demonstrated real savings in hours worked. Employee costs included costs associated with the executive forfeitable share plan, R63.3million of which were first time costs. If these costs were excluded, labour costs were up 3.7% on a like-for-like basis.
Occupancy costs at 3.2% of turnover were 0.1 percentage points up on the 3.1% of last year. The increase of 14.2% was driven by new stores, with an increase in like-for-like occupancy costs of 5.8%, in line with the annual escalation clauses of our long-term leases. The Group is focused on tighter management of occupancy costs in its negotiations with landlords and developers. Operating lease income, expressed as a percentage of turnover, was up 0.1 percentage points as a result of a number of new head leases in the Group. As such, net occupancy costs, as a percentage of turnover, were in line with last year.
Operations costs were up 8.8% on last year, at 3.9% of turnover. The like-for-like increase was 6.8%. The biggest cost drivers in this category were electricity and water, as a result of double-digit regulatory increases in electricity costs and increased water tariffs as a result of water restrictions related to the drought in large parts of South Africa. If these increases are excluded, operations costs were flat on last year. Repairs and maintenance costs were well controlled, and the increased depreciation and amortisation charge of 8.2% was due to higher levels of capital investment in the business.
Merchandising and administration costs, increased just 2.5% on last year (with like-for-like costs up 1.8%), mainly as a result of the reduction in bank interchange fees. The Group is seeing an increase in the participation of card tender, as customers move away from cash to plastic. This eroded some of the benefits from lower interchange fees. Bad debts were down R11.6 million on last year, indicating the improved health of our franchise business.
Trading profit
Trading profit increased 22.3% to R1 516.3 million. The trading profit margin improved from 1.9% to 2.1% of turnover.
Net interest
The Group continued to find savings in net interest charges, notwithstanding increases in interest rates, a substantial increase in capital expenditure compared to last year, and increased inventory levels in the short-term driven by new stores and the accelerated centralisation of supply. The improved turnover performance over the last few years, coupled with stronger working capital management, enabled the Group to repay a further R250 million of long-term debt this year.
Share of associate’s income
TM Supermarkets, the Group’s associate trading in Zimbabwe, delivered a substantially improved result notwithstanding a challenging trading environment. The Group’s share of TM’s income grew from R14.3 million last year to R45.9 million this year, with some benefit from the stronger US dollar. In constant currency terms, profit from TM Supermarkets was up 150%.
Profits and losses on capital items
The Group incurred R32.6 million of capital losses compared with a capital profit of R10.4 million in the prior year. The Group has embarked on a substantial refurbishment programme, with 40 refurbishments completed this year. As part of this process store assets were scrapped and losses incurred. This is a strategic imperative in improving the overall quality of our estate. Profits and losses on capital items are added back when calculating headline earnings per share.
Profit before tax
Profit before tax is up 22.3% to R1 473.5 million, representing an underlying profit before tax margin improvement from 1.8% to 2.0%. Profit before tax, excluding capital items, is up 26.1% to R1 506.1 million, representing a margin improvement from 1.8% to 2.1% of turnover.
Tax
The effective tax rate improved from 28.5% to 27.7%. The reduction is as a direct result of our improved profitability, with no corresponding change in the level of non-deductible expenditure in the Group.
Earnings per share
Basic earnings per share (EPS) – increased 22.5% from 178.79 to 219.11 cents per share.
Headline earnings per share (HEPS) – increased 26.4% from 177.26 to 224.04 cents per share.
Financial position
Sound working capital management and good control over all capital and operating spend led to stronger cash balances over the period, notwithstanding the increased capital investment over the period in respect of growing and enhancing the store estate. The Group delivered a return on capital employed of 29.3%
(2015: 24.0%), while reducing its level of long-term financial gearing, with a repayment of R250.0 million of long-term debt.
Inventory
The increased inventory levels at February 2016, up 10.7%, were due to the 164 net new stores opened over the year (excluding TM Supermarkets) and the increase in the centralisation of suppliers. On a like-for-like basis, inventory is up 1.7% on last year. The decrease in inventory provisioning reflecting the positive impact of the product category reviews and stronger assortment management, which has also improved on-shelf availability in Pick n Pay owned stores by 3.4 percentage points to 96.0%. Boxer delivered improved inventory management, notwithstanding its move to central distribution in KwaZulu-Natal and the Eastern Cape, through its new Cato Ridge distribution centre.
Trade and other receivables
Trade and other receivables increased by R389.8 million, or 13.3%, to R3 326.2 million as aresult of the 59 net new franchise stores and encouraging growth in the issues to franchisees. The quality of the debtors’ book has improved substantially over the last year, with the bad debts expense down R11.6 million, or 30.2%, on last year.
Cash and cash equivalents
Sunday |
Sunday* |
||
Cash balances |
982.9 |
1 024.5 |
|
Bank overdrafts and overnight borrowings |
(100.0) |
(500.0) |
|
Cash and cash equivalents |
882.9 |
524.5 |
|
Total borrowings |
(529.6) |
(784.3) |
|
Net funding position |
353.3 |
(259.8) |
|
*Prior year amounts restated and/or reclassified. Refer to note 10 of the summarised audited Group annual financial statements. |
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Funding
The net funding position was R613.1 million stronger than last year, reflecting the reduced debt levels in the Group and some positive benefit from the financial calendar cut-off at year-end. Stronger working capital management over the year mitigated the impact of the increased capital investment in the business, with net finance charges down 5.9% on last year. Group capital expenditure was R1.8 billion for the year, compared with R1.1 billion in 2015, with 83% of the investment focused on expansion and the refurbishment of existing stores. The Group will repay a further R400 million of structured debt in August 2016.
Shareholder distribution
The Board declared a final dividend of 125.20 cents per share, bringing the total annual dividend for the year to 149.40 cents per share and maintaining a dividend cover of 1.5 times headline earnings per share for the full year.
Good progress on our plan
This is a strong result, achieved through hard work and a determination to get better at everything we do. We are buying better, diversifying our sales through flexible formats, benefiting from greater centralisation of our supply chain, bearing down on costs, and improving our efficiency. We have improved our trading profit margin and delivered another substantive improvement in profits. We are making real progress on our turnaround plan and our aim to restore Pick n Pay to long-term sustainable growth. We would like to acknowledge the hard work of our team, who are not only committed to building a prosperous business, but who continue to uphold the special values that make Pick n Pay such a loved brand in South Africa.
Gareth Ackerman 25 April 2016 |
Richard Brasher |