PnP’s trading loss widened in FY26, and a further one-year delay in reaching the profit breakeven target suggests management may have underestimated the difficulties of the turnaround.
PnP’s GPM improved by 40bps, but we believe this is mainly due to mix effects from a lower franchise contribution and higher clothing sales growth. We estimate that PnP corporate supermarkets’ GPM may have edged up by only 10bps and remains lower than its FY24 margin.
PnP corporate supermarkets’ GPM is also substantially lower than its peers, and a long-term review of total income margins (GPM plus other income margin) shows that while SHP has increased its margins by around 400bps since FY09, PIK has managed to lift them by only 80bps. We offer two likely explanations for this lack of margin expansion. First, as PnP lost its market dominance, rebate and advertising income from suppliers may have declined (this revenue accounted for 450bps of its total income margin of 22.1% in FY08). Second, its central distribution costs may not be fully recovered by suppliers’ distribution allowances. In our view, the turnaround needs to address these issues, as cost-cutting and trimming the store footprint may not meaningfully lift margins.
The looming confrontation with the unions is a major risk to trade. The last major strike at PnP in 2005 resulted in a 16% loss of turnover in the first four days. We recall that the Flex & Mob agreement, concluded in 2011, was intended to address labour flexibility and costs. It appears there was a failure to implement this major transformative agreement, which may have resulted from the significant management changes at the time.
We estimate that the 61 closed stores were allocated around R250m in central costs. Management will have to address these stranded costs, potentially through rightsizing its support structures.