Pick n Pay (PIK) – Still turning around after ten years

PIK delivered disappointing results for FY23, and while reported turnover growth was respectable at 8.9% y-y, adjusted for the R2.7bn in lost sales in FY22, turnover growth was modest at 6.0% y-y. Given high inflation and space expansion, we believe there may have been substantial same-store volume declines, especially in the Pick n Pay (PnP) chain.

We find the resilience of PIK’s GPM surprising as its competitors have noted the impact of the challenging market on their margins. PIK’s GPM improved by 40bps in 2H23, coinciding with sustained higher levels of loadshedding. Our large sample price comparisons, conducted at various dates in FY23, revealed that Checkers’ (SHP) pricing was consistently more competitive than PnP. This may have contributed to the weak topline performance of PnP and aided gross margins, in our view.

The spike in stock holding is concerning and we note a sustained increase in inventory over the past three years. We calculate that, based on the long-term norm of 30 days’ stock holding, PIK’s excess stock could be substantial, at c. R3.1bn in FY23.

We highlight the long-term structural decline in PIK’s net working capital cycle, despite its investment in central distribution and SAP. This is not uncommon, though, as SHP displayed similar trends. We believe central distribution may weaken the net working capital cycles of food retailers but should allow them to generate higher margins to offset this investment. SHP achieved this, but PIK has not yet been able to lift its net margin to compensate for its additional own-capital requirements.

Over the past three years, PIK acquired 63 franchise stores, which we estimate may generate turnover of c. R4.4bn. The increased corporatisation of supermarkets can improve margins, but the rising number of franchise closures and the drop in new franchise store openings could signal internal issues in the business, in our view.