Pick n Pay today reported a much improved second half in the release of its year-end results to 29 February 2012. Chairman Gareth Ackerman said that the company had seen a marked improvement in the second half on the back of major steps forward in transforming the business and a refocused strategy and implementation plan for the business. “Our improved performance over the last six months gives us considerable confidence in the work that we have done in repositioning the Group for the future,” said Ackerman. 

“We have had an eventful year where we have delivered substantively on our plan. These achievements include the sale of our Australian business Franklins for R1.2 billion net of fees, the launch of our Smart Shopper programme which has exceeded all projections, an accelerated store roll out and good progress on several comprehensive corporate change projects within the business.”

Group turnover was up 8.1 percent for the year at R55.3 billion and up 8.7 percent for the second half, with pleasing like-for-like growth, buoyed by Smart Shopper, and a particularly strong performance from the LSM 4-7 segment.  Internal inflation was below CPI, but Ackerman said that consumers were facing inflationary increases across the board which was resulting in cautious spending.

The company’s gross profit margin for the year grew from 17.8 percent to 18 percent, partly due to the initial benefits of specialised category buying, which more than offset the cost of Smart Shopper points.  “We believe that we will be able to strengthen margins over the next few years and still maintain our competitive price position through further category buying and supply chain improvements”, said Ackerman.

Trading profit growth in the six months to February 2012 was reassuring, with an 11.2 percent increase on the same period the year before.  However, for the year, considerable corporate investment costs caused trading profit to drop 10.6 percent to R1 267.5 million at a margin of 2.3 percent (2011: 2.8 percent). A portion of these costs are the initial and non-recurring set up costs relating to Smart Shopper and specialised category buying. 

EBITDA was down 4 percent for the year to R2 073.7 million but was up 9.6 percent for the second 6-month trading period.

Total net cash from operations was up from R3.5 million to R1.6 billion, illustrating significant improvements in working capital management. Clear focus on stock management translated into like-for-like stock holdings reducing by 5.3 percent on last year.

Headline earnings per share were 6.7 percent up for the second six months, but down 15.1 percent for the full last year at 160.78 cents. The total dividend per share for the year at 130.85 cents for Pick n Pay Stores Limited was 8.2 percent down on last year and 63.48 cents for Pick n Pay Holdings Limited was 8.4 percent down on last year. 

Looking at the company’s strategic initiatives, Ackerman said that Smart Shopper, launched in March 2011, had exceeded all expectations with more than five million active cardholders, to which Ackerman attributed the improvement in like-for-like turnover growth. While set-up costs impacted earnings, the programme was expected to drive turnover growth in the medium to long-term and generate additional value through more effective marketing to customers.

Deputy CEO Richard van Rensburg said that the company was “seriously focused” on improving its customer offer and streamlining operations. “We’re in the midst of consolidating and upgrading our support functions so that we are better positioned to deliver improved product and service in world-class stores.” 

“The first steps in this consolidation were the set-up of a specialist category buying function under a strong leadership team, and the centralisation of our supply chain. We have made good progress on both these fronts.  Looking ahead, we will be rationalising our regional and store management and administration functions.

“Specialised category buying constitutes a complete overhaul of buying at Pick n Pay and marks a significant shift in the way in which we engage with suppliers.” The move has already delivered improved performance through the alignment of cost prices across regions reducing cost of goods and a scientific approach to ranging and pricing. However, we still have a long way to go to generate the improvements we are targeting and we expect to incur sizeable continued corporate investment costs in the next 18 months.”

In terms of the company’s centralised distribution strategy, operational improvements at Longmeadow, which is now regularly moving 1.6 million cases a week, include reduced labour and distribution costs per case.  “We continue to focus on this facility to ensure that the supply channel is fully optimised. We are particularly pleased with the way Longmeadow performed during peak Christmas trading this year. With what we’ve learnt from Longmeadow, we will be opening our new Western Cape distribution centre early next month,” said van Rensburg.

“By the end of the year the Western Cape distribution centre will be fully operational. This will represent an important milestone in our supply chain journey as more than 50 percent of total company grocery distribution will be centralised at this point.  The Western Cape distribution centre will however have a negative impact on our financial result this year due to its start-up costs. The benefits from improved stock availability and reduced distribution costs will begin to flow in the following financial year.”

Ackerman said that the new labour agreement with the Union, by reducing costs and affording the company more flexibility, would enable the company to staff its stores more efficiently and match staff scheduling with peak trading times. Benefits of this agreement would start to flow in the current financial year. General expense control also remained a high priority, with a particular focus on goods not for resale and eliminating inefficiencies.

The successful innovations from the upmarket ‘PnP On Nicol’ store would be rolled out into selected existing stores and the company was looking to open 10 - 15 similar stores over the next 3-5 years.

Looking to Africa, Ackerman said: “Our deliberate and steady growth in Africa continued and by the end of the year, our African footprint had reached 94 stores.  We opened three new stores in Zambia during the year, all of which are trading well.  We also opened our first store in Mozambique and our first two stores in Mauritius.  We have three openings planned for 2013 (excluding TM Supermarkets in Zimbabwe), one in each of Mozambique, Zambia and Mauritius. In February 2012 we purchased an additional 24 percent stake in our associate TM Supermarkets in Zimbabwe for R102.5 million (US$13 million), taking our total investment to 49 percent. 

On the sustainability front, the company continued to be recognised as South Africa’s greenest retailer and has extended its green range. The company reduced electricity consumption by 20 percent with a saving of R130 million and announced that its plastic bags would now be made of 30 percent recycled materials. The new Western Cape DC would have off grid power generation, daylight harvesting, rainwater collection and motion sensor lighting.

Ackerman said that this year, there would be a particular focus on the support and development of black businesses. Through partnerships with the National Empowerment Fund, the Industrial Development Corporation and the Departments of Agriculture and Trade and Industry, the company would be providing aspiring businesses the support they need to succeed in supplying the retail industry.   The company was also submitting an application to the Jobs Fund to partner government in sustainable job creation.

“We will also continue to engage government on issues that we believe may hamper business growth. We strongly support freedom of speech and constructive dialogue that holds our government accountable to all citizens.”

Looking ahead, Ackerman said that although there was still significant work to be done on transforming the business, the company was at the point where the real benefits of the changes to date are starting to be felt.

“Our thanks go to Nick Badminton for the critical role he played in transforming the business during his tenure as CEO. He has our very best wishes for his future. The search for a new CEO continues both internally and externally, locally and abroad,” said Ackerman.