Review of operations
Turnaround strategy gains momentum
KEY FINANCIAL INDICATORS
26 weeks to |
26 weeks to |
% |
||
Turnover |
R34.9 billion |
R32.1 billion |
8.5% |
|
Gross profit margin |
17.7% |
17.7% |
||
Trading expenses margin |
17.3% |
17.5% |
||
Trading profit |
R461.6 million |
R385.7 million |
19.7% |
|
Trading profit margin |
1.3% |
1.2% |
||
Profit before tax |
R449.9 million |
R365.9 million |
23.0% |
|
Profit before tax margin |
1.3% |
1.1% |
||
Profit after tax |
R321.4 million |
R261.0 million |
23.1% |
|
Basic earnings per share |
32.83 cents |
26.72 cents |
22.9% |
|
Headline earnings per share |
32.94 cents |
26.51 cents |
24.2% |
|
Interim dividend per share |
11.60 cents |
9.40 cents |
23.4% |
|
RESULT SUMMARY
Pick n Pay demonstrated encouraging momentum in the first half of the financial year as it embarked on Stage 2 of its long-term plan – to change the trajectory of the business. A stronger sales performance, combined with sound gross margin management and tightly controlled capital and operating costs, drove headline earnings per share up 24.2%.
Turnover growth accelerated to 8.5% from 6.1% in the previous financial year, despite an increasingly challenging market environment. Turnover growth came from a good balance between sales from new stores and improved like-for-like growth of 4.4% – evidence that Pick n Pay is winning back customers with tangible improvements in the customer offer. The Group supported customers with competitive pricing and meaningful promotions over the period, containing internal selling price inflation at 3.0%, well below CPI-food inflation of 4.8%.
Gross margin management was a key focus over the reporting period. The Group continued to achieve greater operating efficiency, with benefits invested in the shopping trip, to strengthen the offer and provide support to customers at an increasingly challenging time. The Group maintained its gross profit margin at 17.7%, notwithstanding price investment through an expanded Brand Match, a more personalised Smart Shopper programme and other initiatives.
Sound management of both capital and operating costs has helped deliver a stronger and more stable business. The Group continues to find opportunity to remove cost and operate in a more efficient manner. This work enabled the Group to reduce trading expenses expressed as a percentage of turnover from 17.5% to 17.3%. The improved management of net working capital strengthened cash balances over the period and supported a further reduction in long-term debt, with net interest paid down 23.6% on last year.
Segmental pre-tax profit in the core South Africa division grew by 44.8% on last year, underpinned by stronger sales and greater operating efficiency. Total segment revenue in the Rest of Africa division grew 13.0% to R2.0 billion. However the 14.4% decrease in segmental pre-tax profit of this division reflects the challenging trading conditions in Zambia and the effect of currency fluctuations.
OPERATIONAL REVIEW
We measure our progress over the first half of the financial year against the Group’s seven strategic business acceleration pillars:
Better for customers
The Group has accelerated its improvement of the shopping trip, with customers noticing the benefits at store level. Closer collaboration with producers, combined with better cold chain management is improving the quality and shelf life of fresh produce. The Group has completed its first full round of product category reviews and has streamlined and strengthened its product range. Detailed planograms in key categories are resulting in more effective product display, better on-shelf replenishment and improved product availability. The Group has also made good progress on its plan to enhance its private label range, launching 37 new products over the period, and redesigning the packaging of more than 300 lines.
Smart Shopper was once again voted as South Africa’s favourite loyalty programme in the recent 2015 Sunday Times Top Brands Awards. The Group expanded its Smart Shopper “Partner Programme” over the last six months, personalised vouchers through a “Just for You” mailing campaign, and boosted its “Instant Savings” programme, enabling customers to earn an instant 10% off over 800 items in store simply by swiping their cards.
The Group doubled the number of products covered by its successful Brand Match campaign, which is continuing to improve the customer perception of Pick n Pay prices relative to those of its peers. Successful promotional campaigns included a vibrant 48th birthday month and a Stikeez campaign towards the end of the financial period. Designed as a fun thank you to Pick n Pay customers for their custom and loyalty, the Stikeez campaign captured the imaginations of South Africans young and old.
A flexible and winning estate
The Group opened 83 Pick n Pay and Boxer stores in the 26 weeks to August, including 14 new supermarkets in communities in which it had not previously traded. This compares with 46 stores in the same period last year. This accelerated rate of growth reflects a stronger new space plan which benefits from greater format flexibility and operational efficiencies developed over the past two years.
The Group added 21 new smaller convenience stores over the period, including under our Local, Express and Punch formats. These stores have been well received by customers and are an exciting growth opportunity. The performance of our larger Hypermarket format is improving as we become more innovative in the use of space, more focused on a differentiated product offer and more relevant in our promotional activity.
In Stage 1 of its plan, the Group closed a number of under-performing stores, substantially improving the quality of its estate. Having completed this stage, the number of under-performing stores has reduced considerably, with just four closures over the period.
The Group continued with the refurbishment programme which began in the second half of last year, with the commencement of a further 27 refurbishments in the 26 weeks to August.
The franchise business performed well over the period, with an encouraging increase in sales to franchisees and a decrease in franchise debt. Pick n Pay added 27 net new franchise stores over the period. The franchise model strengthens the Group by including within its ranks a team of passionate, experienced and highly skilled retailers with a strong commitment to the Pick n Pay brand. It also provides an excellent opportunity for emerging entrepreneurs to develop and fulfil their ambitions.
Pick n Pay Online continued to deliver strong growth, particularly in the Western Cape where a new dedicated picking warehouse at the Brackenfell Hypermarket has substantially broadened the product range for online shoppers and has improved availability.
Efficient and effective operations
The Group has consistently recognised that improvements to the efficiency of its operations are key to unlocking cost savings, improving service to customers, creating headroom to invest in the shopping trip and enhancing the profitability of the business. Further progress has been made over the period in reducing trading expenses as a percentage of turnover, both in head office costs and at store level.
Over the past six months, Pick n Pay’s “next generation” store programme has brought together the progress achieved across various areas of the business to deliver new and refurbished stores which offer customers a substantially improved shopping environment, better product ranges and lower operating costs. These stores are characterised by wider aisles, enhanced lighting and signage and dedicated product category alcoves for easy store navigation. Operational improvements include faster checkouts, WiFi connectivity and automatic ordering and replenishment. Product offer has improved as a result of category reviews, product innovation and an expanded private label range. Three “next generation” stores were opened in the first half of the year (one new store and two refurbishments) and the Group is very encouraged by the positive response from customers.
Every product, every day
A central supply chain increases efficiency, lowers cost and improves availability for customers. It enables the Group to reduce back-up storage areas in stores, creating more space for trade and enabling colleagues to spend more time on customers and less on back-end administration.
The Group has made good progress in the period under review, bringing within its centralised supply chain more than 200 new suppliers, more than was achieved over the full 2015 financial year. Volumes issued from Pick n Pay distribution centres were up substantially on last year, contributing to good improvement in on-shelf availability. The Group is steadily progressing towards its aim of a fully centralised supply chain with every product delivered every day to our stores on a short lead time.
The Western Cape region, serviced by the Philippi distribution centre, is at 62% centralisation (80% on groceries). The level of centralisation in our Inland region, serviced by the Longmeadow distribution centre, has reached 55% (65% on groceries). Across all regions, the Group has reached 55% centralisation. The Group is exploring central supply chain opportunities in KwaZulu-Natal and the Eastern Cape. Improvements in the operational efficiencies at our distribution centres, particularly at Longmeadow, have enabled the Group to reduce its cost per case.
A winning team
The Group employs close to 50 000 people in its corporate business, and a roughly equivalent number through its franchisees. Pick n Pay launched its “war on waste” campaign in July 2015, which – alongside commitments on reducing food waste and energy usage – pledged the Group to creating 5 000 new jobs per year between 2015 and 2020, representing 20 new jobs per day. We are already demonstrating meaningful progress, with 1 800 new jobs created over the reporting period.
The Group’s new performance management system, introduced for senior managers last year, has now been launched to junior managers. The Group is also making progress on more efficient and streamlined processes in HR management and on core skills training.
Boxer – a national brand
Boxer opened 12 new stores over the period across its range of formats. The business continues to grow despite increasingly challenging economic conditions. Over the period under review, the business focused on further strengthening its price positioning, and improving the quality of its fresh produce and grocery ranges. Tight cost control is imperative in this low-margin environment and the Group is encouraged by Boxer’s progress in managing overhead costs as a percentage of sales.
Boxer, in line with Group strategy, will move towards a central distribution model. It has built a new distribution centre in KwaZulu-Natal, with the commencement of outbound deliveries in October 2015.
The Group remains confident of the opportunity to grow Boxer into a national brand in South Africa, and will open its first Boxer store in the Western Cape this year.
Rest of Africa – second engine of growth
Growing our business outside of South Africa remains a strategic priority for Pick n Pay, notwithstanding the challenging trading conditions facing some regions. Pick n Pay opened six stores outside South Africa during the period, with three in Namibia, one in Zambia and two in Zimbabwe. The Rest of Africa division recorded growth in segmental revenue (including direct supplier deliveries) of 13.0%. Segmental revenue was up 14.3% in local currency terms, with like-for-like segmental revenue growth of 2.2%.
The Group’s franchise operation outside South Africa, in Botswana, Lesotho, Namibia and Swaziland, delivered strong turnover growth over the period. In addition, the Group’s share of the profits of its associate in Zimbabwe, TM Supermarkets (TM), grew 42.0% over the period to R15.7 million. The business demonstrated improved profitability and operational efficiency in what remains a tough and competitive market.
TM is seeing stronger trading results out of its newly refurbished stores, particularly those bearing the Pick n Pay brand, and is working closely with Pick n Pay management to strengthen its procurement capability and the quality of its fresh produce and grocery range.
Notwithstanding these strong performances from operations outside South Africa, the segmental pre-tax profit of the Rest of Africa division was down 14.4% on last year. This reflects the difficult trading conditions in Zambia and the weakening of the kwacha, as economic conditions deteriorated in a region dependent on the strength of the copper price and the availability of hydro-electricity. However, the long-term opportunities in the region remain good, and the Group plans to open three more stores in Zambia in the next year.
The Group is in the early stages of developing a business in Ghana and will open its first store in that country in the 2016 calendar year.
FINANCIAL REVIEW
Turnover
Group turnover at R34.9 billion was up 8.5% on last year, an improvement on the 6.1% growth recorded in the 2015 financial year. Like-for-like turnover grew 4.4% on last year, an improved performance on the 3.6% recorded in 2015, with new stores adding 4.1% to turnover growth. This performance was achieved in a tough market in which consumer confidence deteriorated in the face of escalating energy, fuel and utility costs, higher taxes, increased costs of borrowing and a weakening rand.
Greater business efficiency assisted the Group to bear down on inflation. Internal food inflation fell to 3.0% over the period, down from 6.3% in the second half of last year, and compares to CPI food inflation of 4.8% for the period.
Gross profit
Gross profit increased by 8.4% to R6.2 billion. The gross profit margin was unchanged on last year at 17.7%, notwithstanding our investment in price through our expanded Brand Match campaign, our stronger Smart Shopper programme and a successful 48th birthday promotion. The centralisation of supply is a key strategic priority for the Group, and as the Group increases the volume of inventory going through its distribution centres, it will continue to unlock cost savings and operational efficiencies to reinvest in the shopping trip.
Other trading income
Other trading income increased by 1.3% to R320.0 million.
Commissions and other income – once-off commissions earned in the prior period on the sale of iTunes vouchers were not repeated this year. As a result, commissions and other income was down 14.9%. Other value-added services including financial services, prepaid electricity, third party account payments and gift cards all showed encouraging growth, underlining the good opportunity for Pick n Pay and Boxer to grow services allied to the shopping trip.
Franchise income – was up 10.8% on last year, reflecting the 27 net new franchise stores added over the period and the encouraging growth in franchise turnover.
Operating lease income – was up 25.6% on last year, which includes substantial new head leases in Pick n Pay. The related operating lease expenses are included within occupancy costs.
Trading expenses
The Group reduced trading expenses as a percentage of turnover, from 17.5% to 17.3%. The increase in like-for-like expenses was restricted to 4.6%.
Employee costs – steady improvement in the efficiency of in-store processes and labour scheduling restricted the increase in employee costs to 6.9% (like-for-like 5.5%), notwithstanding the 52 net new corporate stores added over the period. Employee costs include a charge of R58.6 million in respect of the Group’s employee forfeitable share plan, against a corresponding R2.7 million charge in the same period last year.
Occupancy costs – are up on last year reflecting the new store openings since August last year. Group like-for-like occupancy costs were contained at 6.6%, notwithstanding rising rental pressures across the sector, the impact of dollar-based rentals outside South Africa, and the growing cost of providing adequate security in our stores.
Operations – the biggest driver of the 9.2% increase in operations costs was regulatory increases in electricity and utility charges, which increased well ahead of inflation. Depreciation and amortisation charges were up 6.7% as a result of our store opening and refurbishment programme.
Merchandising and administration costs – were down 6.6%, as a result of lower bank charges associated with the cost of interchange, and the Group’s reduced use of external consultancy support.
Trading profit
Trading profit increased by 19.7% to R461.6 million. The trading margin improved from 1.2% to 1.3%.
Net interest
The net interest charge was down 23.6% to R25.9 million due to stronger net working capital management and the repayment of long-term debt.
Profit before tax
Profit before tax is up 23.0% to R449.9 million, representing a margin improvement from 1.1% to 1.3% of turnover.
Tax
The tax rate remains unchanged.
Earnings per share
Basic earnings per share (EPS) – increased 22.9% from 26.72 to 32.83 cents per share.
Headline earnings per share (HEPS)– increased 24.2% from 26.51 to 32.94 cents per share.
The add-back of capital losses on the sale of assets of R0.6 million, net of tax, has been taken into account in the calculation of headline earnings, against the deduction of capital profits of R1.1 million, net of tax, in the prior year.
Financial position
Sunday |
Sunday |
||
Inventory |
5 218.0 |
4 153.6 |
|
Trade and other receivables |
3 146.7 |
2 709.4 |
|
Cash and cash equivalents |
1 440.9 |
965.4 |
|
Other current liabilities* |
(11 110.5) |
(9 125.8) |
|
Net working capital |
(1 304.9) |
(1 297.4) |
|
* Excludes the short-term portion of long-term borrowings
Net working capital was down only 0.6% on last year, notwithstanding the substantial capital investment over the period as a result of the Group’s accelerated store opening and refurbishment programme. This reflects sound control over all capital and operating expenditure and improved management of working capital, which has removed the need for additional funding and enabled the further repayment of long-term debt.
Inventory – the increased inventory levels at August 2015 were due to the new stores opened over the period, planned stock provisioning ahead of a potential transport strike, and the increase in the centralisation of suppliers, which elevated stock levels in the short term.
Trade and other receivables – increased by R437.3 million or 16.1% to R3 146.7 million as a result of the 27 net new franchise stores and an encouraging increase in issues to franchisees. The quality of the debtors’ book has improved over the last year, with the impairment allowance down 1.9 percentage points, expressed as a percentage of trade and other receivables.
Cash and cash equivalents
Sunday |
Sunday |
||
Cash balances |
1 440.9 |
1 285.4 |
|
Bank overdrafts and overnight borrowings |
— |
(320.0) |
|
Cash and cash equivalents |
1 440.9 |
965.4 |
|
Total borrowings |
(536.1) |
(781.3) |
|
Net funding position |
904.8 |
184.1 |
|
The net funding position was R720.7 million stronger than last year, reflecting the reduced debt levels in the Group and some positive benefit at period-end from the financial calendar cut-off.
Stronger working capital management offset the effect of the increased capital spend over the period, with net finance charges down 23.6% on last year. Group capital expenditure was R611.5 million in the first half of the year, compared with R397.8 million over the same period last year, with 84.0% of the investment focused on expansion and improving the customer experience.
Shareholder distribution
The Board declared an interim dividend of 11.60 cents per share, up 23.4% on last year.
MAINTAINING MOMENTUM IN A CHALLENGING ENVIRONMENT
Trading conditions remain tough in South Africa and other markets, with strong retail competition for customers who are coming under increasing financial pressure at all levels of society. Against this background the Group has remained focused on improving its operational efficiency and delivering greater value and a better shopping trip for customers. This has delivered positive results in the first half of the year and the Group is focused on maintaining this momentum throughout the year.
We wish to thank every member of the Pick n Pay team for their hard work and commitment in delivering this result. They recognise, as we do, that as Pick n Pay grows, so does our contribution to the communities we serve in South Africa and beyond.
Raymond Ackerman
Chairman
12 October 2015