Alcohol and tobacco ban hurting Pick n Pay as it counts the cost of Covid-19
Retailer Pick n Pay says that its financial position has been impacted by South Africa’s lockdown measures – but with so much uncertainty right now, it has no way to predict how its FY21 results will be hit.The group has published its financial results for the full year ending 1 March 2020, showing a 4.7% increase in trading revenue on from the 52-week period ending February 2020.This turnover jumped to R89.2 billion for the year (2019: R85.2 billion), with trading profit up 8% to R3.15 billion (2019: R2.92 billion). Profit before tax was at R1.87 billion (2019: R1.76 billion). Despite these gains, profit after tax declined by 11.5%, the group said, to R1.195 billion, from R1.35 billion the year before.This resulted in a slight decline (-0.6%) in diluted headline earnings per share to 278.81 cents, from 280.60 cents before.
No dividend was declared, with the group saying it took the decision to defer payouts, as uncertainty around the coronavirus persists. “In light of the current economic upheaval from the Covid-19 pandemic, the board has decided that it would be prudent not to declare a dividend at this time but rather to preserve cash,” it said. “It is anticipated that a formal dividend declaration will be considered and communicated once the full impact of the Covid-19 pandemic on the group’s operations can reasonably be known and assessed.”
If it was not for the pandemic, Pick n Pay said it would have declared a final dividend of 173.06 cents per share, maintaining the group’s dividend cover of 1.3 times comparable headline earning per share on a 52-week basis. Pick n Pay’s results reflect the group’s financial performance before the nationwide lockdown took effect, and show the tough economic conditions which have been prevalent across all of its operations – and South Africa in particular. The group noted that it traded in difficult economic conditions throughout the year, with low growth, high unemployment, rising household costs and constrained consumer spending in all regions.
South African operations delivered turnover growth of 5.1% against a strong prior year base, reflecting operational challenges in the second half of the year including the impact of a sustained programme of load-shedding and some supply chain labour disruption. This was countered by a robust performance in its value-add categories, with the group’s SmartShopper rewards programme remaining strong and its partnership with groups like TymeBank progressing. Over 1.2 million TymeBank accounts have now been opened in Pick n Pay and Boxer stores, it said – while new rewards partners such as Steers and Wimpy have joined.
According to group chief executive officer, Richard Brasher, the financial year ahead represents the “biggest challenge any of us has experienced in our careers”.He noted that in the current year, group earnings are currently impacted as a result of the mitigation measures taken by the government to combat Covid-19, including the current (level 5 and level 4) inability to trade in liquor, tobacco, clothing and most general merchandise lines. “These categories make up around 20% of our revenues, and have relatively high margins compared with basic food and grocery lines.” A general reduction in overall consumer and trading activity will also have an impact, Pick n Pay said, as will the additional costs, arising from extra hygiene and social distancing measures which are essential in protecting employees and customers. The cost of providing appreciation bonuses to front-line employees for their work during the nationwide lockdown will also be reflected in the finances.
It’s not all negative, though. One area where the group has seen significant growth on the back of the lockdown is online, where, since the declaration of the state of disaster on 15 March, online revenue has doubled. Other standout information includes: More than 144,000 new customers registered online – this is 8x more registrations than the previous year;
- 200% increase in active transacting customers;
- 1,000% growth in first time customers vs last year;
- Dedicated online facilities and in-store click & collect platforms delivered a growth of over 150%.
- Outlook: uncertain
The group noted that the many current and future uncertainties arising from the pandemic mean that it is simply not possible at this stage to estimate or quantify the likely impact over the full financial year. It assured shareholders that it was well positioned for the crisis, with stable funding and the required liquidity. “We have no long-term structured debt, and have actively managed its working capital needs through short-term cost effective facilities,” it said. “We are well-positioned for the crisis, with a stable funding platform and necessary liquidity.” Pick n Pay said that given the various uncertainties, it believes that consumption of food and non-alcoholic beverages will be fairly robust, although any growth will be limited by the pressure on incomes and spending.
Sales in other sectors are likely to be more substantively impacted, however – depending on the duration of the crisis. Most notably, “the performance of categories such as alcohol, tobacco, and some general merchandise products will depend crucially on the duration of the current prohibition on sales, and any recovery when sales are permitted again,” it said. “The impact on profitability will derive not only from a general reduction in sales, but from any disproportionate impact on higher margin sectors such as alcohol, general merchandise and clothing.”