Pick n Pay share price under pressure after sales update

1. Pick n Pay Stores expects an earnings loss for the interim period, largely due to loadshedding, supply chain and restructuring costs
2. Pick n Pay Stores reported a 4.8% increase in sales during the first four and a half months of FY24, driven by strong sales momentum in the Boxer supermarket chain and online sales segment
3. Sales in South Africa grew by 4.4%, while the Rest of Africa segment saw sales increase by 15.9% on a constant currency basis
4. Pick n Pay SA faced challenges in maintaining sales momentum due to load shedding costs, but sales recovered towards the end of the period.
5. The company's Project Future initiatives, aimed at streamlining operations and reducing costs, gained meaningful traction during the period

Pick n Pay Stores reported a 4.8% increase in sales during the first four and a half months of FY24. This growth was driven by strong sales momentum in the Boxer supermarket chain and the online sales segment. South Africa sales grew by 4.4%, while the Rest of Africa segment saw sales increase by 15.9% on a constant currency basis.

The company experienced growth in various business segments. Clothing sales in stand-alone stores grew by 10.9%, group liquor sales increased by 9.8%, and online sales had an impressive growth rate of 75.3%. This shows that Pick n Pay is successfully capturing market share in multiple areas.

Despite overall sales growth, Pick n Pay SA experienced muted sales due to the company's efforts to contain the margin impact of load shedding costs. However, sales momentum recovered towards the end of the period, with the last three weeks showing growth of 2.4%.

The company's Project Future initiatives, aimed at streamlining operations and reducing costs, gained meaningful traction during the period. With the completion of the Voluntary Severance Programme and the Junior Store Management restructuring, the company expects restructuring charges of approximately R250 million but anticipates annualized ongoing cost savings of approximately R300 million.

Pick n Pay Stores demonstrated an intensive focus on working capital management, resulting in a substantial cash release from working capital during the period. The company is on track to exceed its stated FY24 working capital target of a R0.5 billion to R1 billion cash release. This highlights the company's commitment to optimizing its financial resources.

Despite the challenges faced during H1 FY24, management expects the H2 FY24 earnings outlook to be materially stronger as a result of more supportive earnings seasonality, relatively low net incremental energy cost growth, non-repeat of supply chain cost duplication, and efficiency gains from the H1 FY24 Project Future initiatives beginning to contribute.

The update was weaker than markets were expecting, preempting a first half earnings loss for the company. The loss for the period finds fruition from abnormal supply chain, restructuring and load shedding costs over the reporting period.

Pick n Pay – trading view

The long-term trend for Pick n Pay remains down as we see the price trading well below the 200-day simple moving average.

In the near term we have seen the price forming a breakaway gap to the downside.

3110 becomes the initial downside support target from the move. Traders who are short might consider using a close above gap resistance as a stop loss indication for the trade.