Review of operations
KEY INDICATORS
| 2013 | Normalised trading calendar pro-forma 2012 |
Comparable pro-forma change |
As previously reported 2012 |
Change | |
| Total till sales | R35.0 billion | R32.3 billion | 8.1% | R32.7 billion | 6.9% |
| Turnover | R30.1 billion | R28.0 billion | 7.5% | R28.3 billion | 6.2% |
| Gross margin | 18.1% | 17.7% | 17.6% | ||
| Trading profit | R317.5 million | R235.6 million | 34.8% | R275.7 million | 15.2% |
| Basic earnings per share | 40.05 cents | 31.88 cents | 25.6% | 37.73 cents | 6.1% |
| Headline earnings per share | 40.81 cents | 30.06 cents | 35.8% | 35.91 cents | 13.6% |
| EBITDA | R810.5 million | R697.3 million | 16.2% | R737.4 million | 9.9% |
| Dividend per share | 14.80 cents | 14.75 cents | 0.3% |
The Group implemented a 52-week financial reporting calendar in February 2013. The 2014 interim financial period consists of 26 weeks, which is two trading days fewer than the comparative period last year. Interim results in this commentary have been presented on a comparable pro-forma basis with adjusted prior period numbers, for meaningful comparison. This has not been reviewed or reported on by the external auditors and is prepared for illustrative purposes only and is the responsibility of the directors.
Improved performance
The Group has delivered an improved financial performance on the previous period, growing total Group till sales (for owned and franchise stores) by 8.1% in an exceedingly competitive market. We are encouraged by the like-for-like till sales growth of 4.0%, against 3.2% last year, which is a strong indication that we are stemming recent market share losses.
We are serving more customers than ever before, increasing our customer count by 3.3% during the period, while processing 380 million transactions through our tills.
The increase in turnover, supported by an improved gross margin and tighter fiscal control has delivered headline earnings per share which are up 35.8% on a comparable basis.
A stronger business
We believe that we have reached the point where the greater part of the structural change and its associated costs are behind us. We are now able to build on the capabilities that have been put in place and begin to realise the potential of our investments. Our energy and focus has substantively returned to the basics of good retailing. There is no area of the Group that has not been inspected in the past six months and we made improvements in all of them.
We were extremely proud to be voted the number 1 grocery store and overall favourite retail brand in South Africa in the Sunday Times Top Brands awards.
This is a strong endorsement by customers of our brand, our offering, the service we provide and the hard work we have put in over the last few years. Yet we remain far from satisfied with our performance and know that we can and will continue to make substantial improvements to the shopping trip.
We have made good progress across the supply chain, resulting in an enhanced product range, improved stock availability and better quality fresh produce. We continue to support our customers and have invested some of our margin improvements back into price through more targeted and relevant promotions, keeping our food selling price inflation at 4.2% for the six months (2012: 7.5%), well below food CPI of 6.4% for the period.
Although we are confident that our stores are starting to improve, reducing our operating costs remains a priority. We will take the action necessary to remain agile in this competitive market and deliver improved returns to shareholders.
Clearer way forward
We know there is significant potential in the business and we have a clear plan to realise it. More than ever, our aim is to meet the needs and aspirations of our customers, staff, communities and shareholders.
OPERATIONAL REVIEW
We have broad appeal across all income groups, from lower income communities to the most affluent households. The key to success in retail – and the heart of any good business – is to appeal broadly, to exclude nobody, and to move hand-in-hand with customers’ needs and aspirations. With its rich history of inclusiveness and its deep well of customer loyalty, Pick n Pay is uniquely positioned to do this successfully. We opened 44 new stores across all formats during the period, and closed nine under-performing stores in order to maintain the quality of our offering.
The Group is managed through two 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 expansion into the rest of Africa and operates in Namibia, Lesotho, Swaziland, Mozambique, Mauritius, Botswana, Zimbabwe and Zambia.
We opened 38 stores in South Africa during the period. There is ample opportunity to expand our footprint in South Africa, particularly into areas where we have not yet traded. We were delighted to open stores in Chatsworth, KwaMashu, Hammarsdale, Burgersfort, Pongola, and Elim during the period, all areas in which Pick n Pay has never operated before.
The Africa Division continues to grow steadily with six store openings across Zambia, Mozambique, Namibia and Zimbabwe during the period.
We now have more than 1 000 stores, consisting of 594 owned and 433 franchise stores, across multiple formats and in eight countries. In addition, 51 stores are operated in Zimbabwe, by our associate TM Supermarkets, two of which trade successfully under the Pick n Pay banner.
While the Group remains focused on our core South African business, we continue to look for profitable and sustainable growth opportunities in the rest of Africa.
We are encouraged by the progress we have made during the period under review:
- We have improved efficiencies and reduced costs at our distribution centres. Grocery volume through our central distribution channel is up 16.4%, with an overall reduction in cost per case of 2.4% at Longmeadow. We have improved the stock availability of our top 1 000 product lines by 3.3%, growing the sales of these lines by 9.2%;
- Working closely with suppliers we are improving product ranges, reducing prices and providing more targeted promotions;
- We have refreshed our smart shopper loyalty programme, making it simpler for customers to use, with instant rewards and more benefits, and have reduced the operating costs of the programme by 20%;
- We have grown Pick n Pay Online into one of South Africa’s top online businesses, with turnover growth of 24.0% on last year and an increase in online shoppers of 15.8%. We are the first retailer in South Africa to offer 1 hour delivery time slots for groceries;
- Our investment in information systems has resulted in fundamental improvements in our forecast and replenishment capabilities, an enhanced financial reporting platform and the roll-out of a world class point of sale system;
- We have made good progress with the centralisation of our finance and administration functions. This will reduce cost and increase efficiency by eliminating the duplication of processes around the country; and
- We have reviewed and restructured our support office function to create a more effective and efficient organisation.
FINANCIAL REVIEW
The Group implemented a 52-week financial reporting calendar in February 2013. The 2014 interim financial period consists of 26 weeks, beginning 3 March 2013 and ending on 1 September 2013, which is two trading days fewer than the comparative period. In order to ensure accurate comparability we have presented the prior period numbers to accord with the new financial calendar in this commentary. A comparison on this basis gives a more accurate and relevant assessment of our performance. Please refer to the table presented at the beginning of this announcement for published prior period numbers.
Turnover
Group turnover increased by 7.5% to R30.1 billion (2012: R28.0 billion). Like-for-like turnover growth was 3.1% and new stores contributed 1.7% to our trading space and 4.4% to sales.
Point of sale turnover growth is more in line with the retail market, with total till sales from both owned and franchise stores growing by 8.1% on last year (like-for-like growth of 4.0%).
Pick n Pay internal food price inflation for the period was 4.2% (2012: 7.5%), against CPI food inflation of 6.4%.
While turnover growth remains under pressure, it is against a backdrop of a depressed economic environment in which our consumers struggle under increasing costs of basic services, high levels of unemployment and rising household debt. At the same time, competition within the retail industry remains fierce. We believe that our relentless focus on value, quality and service is winning customers back to Pick n Pay, and we are once again growing in line with the market.
Gross profit
Gross profit at R5 457 million showed a 0.4 percentage point improvement in margin at 18.1% of turnover. We are encouraged by the margin enhancement, which is due in part from cost savings and efficiencies achieved in our supply chain.
We are pleased with the improvements we are seeing at our Longmeadow Distribution Centre in Johannesburg which, having provided significant challenges in the past, has reduced operating costs and is producing significantly improved service to stores. While there is still much work to do to harness the full potential of the facility, we are pleased with the progress made since bringing the management of the facility in-house. Our Philippi Distribution Centre in the Western Cape continues to perform well, providing us with a sound benchmark of how central distribution can work to the full advantage of the Group. We will be rolling out some of Philippi’s world-class functionality to our other distribution centres around the country.
Trading profit
The trading margin, at 1.1% of turnover, shows a 0.2 percentage point improvement on last year. Total expenses have increased by 9.4%. Like-for-like expense growth is 6.2%, with 3.2% of total expense growth being attributable to new stores opened in the past year.
The following have contributed to the increase in operating expenses:
- We continue to see our customers switching their form of tender from cash and debit cards to credit cards, which comes at a significantly increased cost for the Group. We will work closely with South African banks to make sure that credit card charges are more reflective of their underlying cost;
- Occupancy costs increased in line with the increase in new stores; and
- We have reached a new three-year wage agreement with our labour unions. We will work together with our unions to further improve our productivity, in order to manage labour costs, which are a major portion of our trading expenses.
We have maintained strong fiscal control of the business and have taken action to further reduce our costs, particularly in respect of support office overheads, the consequences of which will be evident in the next financial year.
Interest
The net interest expense of R54.9 million is up R16.4 million on last year (2012: R38.5 million) due to increased short-term borrowings over the period, necessitated by our investment in new stores and the increased inventory required.
Earnings per share
Headline earnings per share (HEPS) increased 13.6%, from 35.91 to 40.81 cents per share. The new 52-week financial reporting calendar reduced the current reporting period by two trading days, which impacted HEPS by 5.85 cents per share. If the impact of the new calendar is excluded, the increase on the prior period is 35.8%.
Basic earnings per share (EPS) increased 6.1%, from 37.73 to 40.05 cents per share. The new 52-week financial reporting calendar reduced the current reporting period by two trading days, which impacted EPS by 5.85 cents per share. If the impact of the new calendar is excluded, the increase on the prior period is 25.6%.
Financial position
| 1 September 2013 Sunday Rm |
31 August 2012 Friday Rm |
|
| Inventory | 3 950.7 | 3 981.1 |
| Trade and other receivables | 2 389.9 | 2 163.6 |
| Cash and cash equivalents | 1 340.3 | 1 044.8 |
| Current liabilities | (9 157.2) | (8 672.7) |
| Net working capital | (1 476.3) | (1 483.2) |
Our level of net working capital is in line with last year. Although the value of inventory appears only marginally down on last year, once the impact of provisioning new stores is taken into account, inventory in like-for-like stores has reduced by R190 million or 4.8%. The increase in trade and other receivables is due to new franchise stores. The Group used short-term borrowings under its DMTN programme effectively during the period, receiving competitive interest rates in the capital markets.
Shareholder dividends
In line with our review of all aspects of the business, the Board has moderated its annual dividend cover to 1.5 times headline earnings per share. This has resulted in an interim dividend of 14.80 cents which is up 0.3% on the previous year.
Prospects
Over the course of the last six months we have delivered an improved performance, built a stronger business and agreed on a clearer plan for the future. We are determined that Pick n Pay customers will benefit from our investment in infrastructure through improved availability, choice, quality and price. Our management team is resolute in improving our customer offering, to ensure we stay the customers’ favourite grocery store.
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| Gareth Ackerman Chairman |
Richard Brasher Chairman Chief Executive Officer |
21 October 2013