Johannesburg - JSE-listed Pick n Pay expected food inflation to ease and a 25 percent jump in its headline earnings in the first half of the 2017 financial year, it said on Friday.
The strengthening of the company’s headline earnings is the latest indication it will deliver on its turnaround strategy, which includes cutting costs in a bid to regain lost market share.
In the statement, Pick n Pay said headline earnings a share would increase by between 20 percent and 25 percent to 79.94 cents and 83.28c a share respectively, from 66.62c a share in the previous corresponding period.
The company noted that its track record of greater operating efficiency and improved customer focus had provided a strong platform for growth.
“It believes that the pressures facing consumers - in particular the pernicious effect of high food inflation - may begin to alleviate in the coming months,” it said.
Pick n Pay said that a successful turnaround required a programme of improvement over a number of years, and the half-year results of 2017 would represent the seventh consecutive reporting period of substantive profit growth.
Discipline
“This result is underpinned by stronger operational and financial discipline, with tight expense control in an inflationary economy,” Pick n Pay said.
It said its turnover growth of 7.2 percent reflected a tougher trading environment and some internal disruption from store refurbishments as the group continued to improve the quality of its estate.
Ron Klipin, a portfolio manager at Cratos Wealth, said on Friday that Pick n Pay would post a good set of results through its revised strategy, which entailed a major reduction in costs, a turnaround in the newly introduced logistics operations, as well as a reduction in management and consultant costs.
“These benefits are likely to drive profit growth for the next few years. However, the group turnover of 7 percent , is below that of the Shoprite group,” Klipin said.
“In addition, food inflation has escalated to around 7 percent , due to the drought and weak rand, resulting in no increase in Pick n Pay's turnover in real terms,” he said.
Klipin said if the drought was broken and the rand were to stabilise, food prices might reach a peak early in 2017. “In the meantime the consumer will remain under pressure, with less disposable income, and major competition among food retailers. This could, however, put some break on food price increases.”
Suvasha Kander, a fund manager at Ashburton Investments, said Pick n Pay’s headline earnings were in line with consensus for the full year, although the company’s turnover had slowed.
Kander expected food inflation would be 10.6 percent year on year in 2016 and peak at 12 percent in the last quarter.
Kander also expected a deceleration of food inflation early next year with average inflation of 6.3 percent. “The expectation is that there will be rain in mid-October, and this should bring some relief to food inflation.
“Pick n Pay needs to work on the second phase of its recovery strategy, which is to recover sales to get the business to the next level.”
Shares gained 0.97 percent to close at R68.64 on Friday in Johannesburg.
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