Pick n Pay faces big challenges

36ONE Asset Management founder Cy Jacobs said Pick n Pay is a risky investment considering the headwinds it faces in South Africa.

Pick n Pay has had a dismal performance over the last few years. Its share price plummeted 76% from its highs in 2018.

The retailer’s challenges reached such concerning levels that it kicked out former CEO Pieter Boone and replaced him with Seam Summers.

Summers is a Pick n Pay stalwart who worked for the company from 1974 to 2007. He became managing director in 1996 and CEO in 1999.

During his tenure as CEO, Summers made Pick n Pay the clear grocery market leader in South Africa.

He achieved an average annual revenue growth rate of 16% per annum – much higher than Shoprite’s 11% over the same period.

Pick n Pay also generated more revenue than Shoprite during Summer’s tenure as chief executive.

With Summers back at the helm, the management team is employing a ‘store-to-store’ strategy to return momentum to the company.

Summers told Daily Investor he wanted to return to the retailer because Pick n Pay has always been the “love of his life” despite leaving it 15 years ago.

“It distressed me as much as the chairman to see the situation that Pick n Pay ended up in,” he said.

Despite the company’s current situation, Summers is optimistic that there is still space in the market for Pick n Pay.

“I think if we apply our minds correctly, we can come back and carve back its place in the marketplace,” he said.

“It’s about putting that passion back into the business, and that passion has to be shared by everybody. Every associate in the business should feel that same love and sense of belonging.”

While Summers believes it is his job to revitalise the company, he said it is important to be realistic.

He estimated that it would take around two years for the market to notice a significant turnaround in the company.

Pick n Pay’s investment case

Summers’ return as Pick n Pay CEO raises the question of whether Pick n Pay offers value to investors looking to pick up a retailer on the cheap.

36ONE’s Cy Jacobs is not convinced. He told Biznews Conference delegates many South African stocks, including some retailers, offer value. However, Pick n Pay is not one of those stocks.

“I would not advise you to buy Pick n Pay, even though Sean Summers, an excellent manager, is stepping in to fix the company,” he said.

“You are up against Shoprite, which is spending as much in capex annually as what Pick n Pay is going to raise from the market to fix its balance sheet.”

He referred to Pick n Pay’s board approving a two-step capital raise of up to R4 billion for the struggling retailer earlier this year.

The company said this raise aims to stabilise its balance sheet, strengthen liquidity, unlock shareholder value, and set a platform for long-term sustainable growth.

Even with more capital, it is unlikely to be enough to take on Shoprite “slamming Pick n Pay on all fronts”.

“I know landlords of major shopping centres are asking Pick n Pay to move out. This is because other tenants complain that they are not getting foot traffic because Pick n Pay is there,” he said.

“The other tenants want a Checkers or Woolworths in the shopping centre to drive traffic. They don’t want a Pick n Pay.”

“Shoprite has significantly outperformed Pick n Pay over the last ten years. It is a phenomenally well-run business.”

Jacobs said the situation is unlikely to change over the short term, which is why he would not buy Pick n Pay into recovery.

Pick n Pay versus Shoprite

The charts below compare Pick n Pay’s financial performance with Shoprite’s over the last three years.