Pick n Pay share price drop highlights results disappointment

Key Takeaways:

1. Increase in turnover: Pick n Pay Stores Ltd. reported a 5.4% increase in group turnover, reaching R54.1 billion in the first half of the 2024 fiscal year.
2. Shrinking gross profit margin: Despite the increase in turnover, Pick n Pay's gross profit margin decreased from 19.4% to 18.5%. This implies that the company faced challenges in maintaining profitability and managing costs.
3. Soaring trading expenses: The company experienced a significant rise in trading expenses, primarily driven by energy costs and employee restructuring costs. These expenses increased by 13.7% to R11.2 billion, impacting the company's overall profitability.
4. Factors impacting performance: Pick n Pay's disappointing results can be attributed to load shedding and increased market competition. The company had to spend a substantial amount on diesel to power generators, limiting its ability to engage in promotional activities and impacting expense growth.
5. Positive growth areas: Despite the challenging trading environment, the company experienced positive growth in certain areas. Notably, there was a 16.1% increase in turnover from the Boxer SA division, 7.3% growth in other income, and significant energy savings of R124 million due to mitigation efforts against load shedding expenses

Pick n Pay faced challenges in the first half of the 2024 fiscal year. While there are positive growth areas, the company anticipates a decrease of over 20% in full-year FY24 compared to the previous year. This highlights the need for strategic leadership and effective cost management in navigating challenging periods.

A look at the results

Pick n Pay Stores Ltd. (JSE: PIK) recently released its interim results for the first half of the 2024 fiscal year. The South African retail giant reported a group turnover of R54.1 billion, a 5.4% increase from the R51.3 billion reported in the same period of the 2023 fiscal year. Despite the increase in turnover, the group's gross profit margin shrunk from 19.4% to 18.5%.

The retail giant's trading expenses soared by 13.7% to R11.2 billion from R9.8 billion, mainly due to energy costs and employee restructuring costs. Consequently, the company's trading profit plummeted by 97.5% to R31.8 million from R1 253.3 million. The group also reported a loss before tax and capital items of R837.2 million, a stark contrast to the R671.8 million profit before tax and capital items reported in the previous year.

Pick n Pay's disappointing results were largely impacted by load shedding and increased market competition. The company spent R396 million on diesel to power generators and keep stores operational, which not only spiked expense growth but also limited the company's ability to engage in promotional activities.

Despite the challenging trading environment, the company's Boxer SA division contributed strongly to the group's turnover with a 16.1% increase. Other income also grew by 7.3%, and the company reported R334 million in Project Future savings. Furthermore, the company made an energy saving of R124 million as it strives to mitigate the impact of load shedding related expenditure.

In response to the disappointing performance, the board appointed Sean Summers as the new CEO from 30 September 2023. Summers, a veteran of the company, previously led the group through a highly successful period.

In the face of adversity, the company saw positive growth in certain areas. These include a 76.3% growth in online sales, 16.1% sales growth from Boxer, SA's leading soft-discounter, and 13.8% sales growth from standalone Pick n Pay Clothing stores.

However, the company anticipates that earnings for the second half of the 2024 fiscal year will be stronger than the first half, driven by more supportive earnings seasonality, low net incremental energy cost growth, non-repeat of supply chain cost duplication, and efficiency gains from the H1 FY24 Project Future initiatives. Despite this, the group expects full year FY24 to decrease by more than 20% compared to full year FY23.

Broker ratings

The average analyst / broker rating on the stock (as per Refinitive data) leans between hold and sell, as of the 18th of October 2023. The mean of these analyst’s long term price targets arrives at a target of R42.61 for the share. It should however be noted that after the company’s disappointing results, we could see rating and price target adjustments reflecting thereto.