Pick n Pay closing stores

 ·28 May 2024

Pick n Pay is in serious financial trouble. As part of a turnaround strategy, it will close loss-making stores and convert Qualisave stores back to Pick n Pay stores.

Pick n Pay CEO Sean Summers revealed the company’s plans to close non-performing stores during the company’s annual results presentation.

The company’s financial results revealed a retailer in tremendous financial distress and dire need of a successful turnaround.

Pick n Pay suffered a 373% decrease in net profit, dropping from a R1.17 billion profit to a R3.2 billion net loss.

The poor performance filtered down to the balance sheet. For the first time, Pick n Pay has become technically insolvent.

The main reason for Pick n Pay’s technical insolvency is its interest-bearing debt, which rose by R5.7 billion from a year ago.

Pick n Pay’s debt interest costs it R2.4 billion a year. The company’s net debt-to-EBITDA increased from 1.1 times to 6.3 times.

The rapid debt increase caused Pick n Pay to breach all its debt covenants, raising concerns about its ability to repay its debt.

Pick n Pay has a debt-to-EBITDA covenant threshold of 2.75 times. Its current debt-to-EBITDA sits at 6.3 times.

Pick n Pay has also breached its second debt covenant, which requires its EBITDA to be at least 3.5 times greater than its net interest expense. It is only 3.2 times greater.

Pick n Pay’s lenders agreed to relax its debt covenants – at a price. Pick n Pay had to pledge additional security on its debt in the form of 100% of Boxer’s shareholding.

Simply put, if Pick n Pay cannot repay its debt, lenders can sell Boxer to cover the money they are owed.

The retailer’s dismal financial position shows why the Pick n Pay board booted former chief executive Pieter Boone and asked Summers to return.

Pick n Pay closing stores

Pick n Pay CEO Sean Summers.

As part of Pick n Pay’s turnaround strategy, the company has assessed the performance of all its stores.

They have identified many stores in critical condition due to factors like demographic changes or a problem with the shopping centre.

“These stores will be closed. We will close and get rid of the stores that have no future,” Summers told investors.

He added that they will not make the same mistake as in the past to convert these struggling stores into franchises.

“You merely end up with an extraordinary franchise debt and franchisees under too much pressure,” he explained.

However, he said they will still concert certain Pick n Pay stores to franchises where franchisees can deliver higher sustainable profits and growth.

They will also convert some Pick n Pay stores to Boxer stores, where the Boxer business is expected to serve the catchment areas better.

Another big development is that the company will convert Qualisave branded stores back to Pick n Pay stores.

The retailer launched its Pick n Pay QualiSave brand in August 2022 as part of its Ekuseni strategy.

“Pick n Pay QualiSave is dedicated to customers who want Pick n Pay quality at exceptional prices,” it explained.

“Pick n Pay QualiSave stores will offer customers 8,000 products, with an emphasis on meat, fresh produce, and bakery and a focus on essential commodities.”

The Pick n Pay QualiSave stores were revamped to make them easily distinguishable from Pick n Pay stores.

However, the Ekuseni strategy and the Pick n Pay QualiSave rebranding did not work. It was an expensive blunder, which the company is now rolling back.

Pick n Pay chairman explains

Pick n Pay chairman Gareth Ackerman.

Pick n Pay chairman Gareth Ackerman explained that their management team undertook a strategic business review in 2022.

The Ekuseni strategy emerged, which Boone described as the “biggest and most important change in Pick n Pay for many years”.

The strategy included a new customer value proposition, accelerating Boxer growth, and achieving omnichannel and digital leadership.

The four-year plan was to deliver turnover growth at a compound annual rate of 10% and increase the profit before tax margin to above 3.0% by 2026.

Liabilities relating to the core Pick n Pay supermarket business, Boxer, Rest of Africa, and the clothing business were converted to long-term debt.

The company also raised capital to support the four-year Ekuseni strategy, which is described as Pick n Pay’s new chapter.

Ackerman said it became evident that key elements of the strategy were not working in the core Pick n Pay supermarket business.

“The problem we were facing had been correctly diagnosed – it was the solution that was strategically flawed,” he said.

“Fortunately, it was only nine months after the launch of Ekuseni that the board took immediate and decisive action.”

They brought back Summers to rapidly rebuild the Pick n Pay team using a number of current, new, and former executives.

“Many executives had been playing out of position, and now they are back to doing what they’re good at,” Ackerman said.

He said notwithstanding the challenges they face, Summers’ return has helped to lift the morale at Pick n Pay and create enthusiasm about a successful turnaround.

Read: The biggest companies in South Africa – and what their CEOs get paid

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