Warning about Pick n Pay
High-profile analysts have warned that Pick n Pay’s planned turnaround is far from guaranteed and that buying the share should be seen as speculative.
Pick n Pay had a challenging few years, with declining market share, leadership changes, and a failed turnaround strategy.
The retailer’s audited results for the year that ended 25 February 2024 were disastrous. Net profit decreased by 373% as it swung from a R1.17 billion profit to a R3.2 billion net loss.
Even more concerning was that Pick n Pay had, at the time, become technically insolvent for the first time in its listed history.
The company’s net debt-to-EBITDA increased from 1.1 to 6.3 times, and Pick n Pay breached all its debt covenants.
It was time for drastic measures. The new chief executive, Sean Summer, announced a multi-pronged approach to turn the company around.
His ‘Back to Basics’ strategy included a new leadership team with experienced executives with proven track records.
He rolled back many changes under the failed Ekuseni strategy, including changing Qualisave stores to Pick n Pay stores.
The retailer also reset its store estate, including closing poorly performing supermarkets and converting others into Boxer stores.
It is also enhancing its product range, pricing, and promotions to attract and retain customers and compete more effectively with Checkers.
Another key pillar is an optimised operating model, streamlining Pick n Pay’s operations to reduce costs and improve efficiency.
It also explores opportunities to collaborate with other retailers and suppliers to improve its product offering and reduce costs.
It has made significant progress in all these areas. It has closed numerous stores, cut costs, and launched many promotions to attract customers.
For example, last month, FNB and Pick n Pay extended their partnership to offer their clients lower prices and rewards on essentials, groceries, and clothing.
More recently, it announced aggressive Black Friday deals and reported strong customer support for the promotional items in-store and across its online platforms.
Pick n Pay recapitalisation
A core pillar of Pick n Pay’s turnaround strategy is its recapitalisation plan to strengthen its balance sheet and reduce debt.
The first step was the successful R4 billion rights offer completed three months ago. It helped Pick n Pay to return to a positive equity position of R2.9 billion.
The second step is the Boxer initial public offering (IPO), through which the retailer will raise R8.5 billion.
On 11 November 2024, Pick n Pay announced that it aims to raise between R8.0 billion and R8.5 billion through Boxer’s initial public offering.
Boxer planned to offer up to 202.4 million shares, around 40% of its total issued share capital, at a price of between R42 and R54 per share.
There is great excitement around the Boxer listing, and many market commentators predicted that the share price will likely to on the high end of the guidance.
On Wednesday, Pick n Pay informed qualifying investors that orders submitted below R54.00 per share risk receiving no allocation.
“The order book is multiple times covered at the top end of the offer price range,” Pick n Pay said in a SENS announcement.
It said an offer price at the top end would result in the issue of up to 157,407,408 shares, representing up to 34.4% of Boxer’s issued share capital.
Pick n Pay will use the proceeds to settle its outstanding debt and reinvest in the core Pick n Pay supermarket business.
This was the best possible outcome for Pick n Pay shareholders as it would raise all the needed capital while maintaining a large Boxer shareholding.
Pick n Pay after the Boxer JSE listing
The market responded positively to Pick n Pay’s successful rights issue, oversubscribed Boxer listing, and progress on the turnaround plan.
The company’s share price increased by 59% in 2024, making it one of the best-performing stocks on the JSE.
However, despite the strong run in 2024, analysts warned that investors should tread carefully when buying this stock.
After Boxer’s JSE listing, Pick n Pay will hold a majority stake in Boxer and the existing Pick n Pay stores business.
It raises the question of how much the Pick n Pay stores business, which includes Pick n Pay retail outlets, clothing stores, and hypermarkets, is worth.
Another question is whether Pick n Pay will be seen as an investment holding company that trades at a discount to the sum of its parts.
Jean Pierre Verster, founder and CEO of Protea Capital Management, said he would not be surprised if Pick n Pay trades at a slight discount.
There is great uncertainty on whether the current Pick n Pay stores business will be turned around and start generating profits in 2026, as planned.
Grant Nader from Benguela Global Fund Managers added that turning around the core Pick n Pay business still has a long way to go.
“They will be rightsizing and cutting costs. This is a scale game, and they are moving in the opposite direction,” he said.
He explained that Shoprite Checkers and Spar continue improving their offerings and aggressively rolling out new stores.
“It is competitive on all fronts. This is a scale game where price and margin are important. The retailer with the biggest scale has the biggest advantage,” Nader said.
“I will sit on the sidelines and wait. It is not a quick turnaround, which makes it a speculative investment.”
Devin Shutte from The Robert Group said Pick n Pay has underinvested in their business for many years.
They are now playing catchup with Checkers with store formats, the look and feel of their supermarkets, and their distribution.
He said although Pick n Pay, under the leadership of Sean Summers, can turn the company around, it will not be easy.
He said it remains to be seen whether the company can flourish again. “Even with the multiple recapitalisations, the execution risk is high,” Shutte said.
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