Low-growth SA economy weighs down Pick n Pay shares despite rise in profit

By Janice Kew

Bloomberg – Pick n Pay Stores fell the most in five months after South Africa’s second-biggest supermarket chain missed expectations for full-year earnings and as struggling consumers seek cheaper food.

Earnings excluding one-time items climbed 17% to R2.58 per share in the 12 months ending February 26, the Cape Town-based company said in a statement on Wednesday. That compared with a median estimate of 14 analysts of R2.67. Sales rose 7% to R77.5bn ($5.8bn).

“At all income levels, people are finding it harder to make ends meet – they are demanding consistently lower prices and better value,” Pick n Pay Chief Executive Officer Richard Brasher said in a statement. “In our low-growth economy, competition for the hard-pressed customer is going to be the new normal.”

South African shopping chains have sought ways to attract customers with limited spending money as a 2016 slowdown in economic growth hurt household incomes.

Shoprite Holdings, Africa’s biggest food retailer with a focus on low-income customers, may be better placed to benefit from cash-strapped consumers “trading down,” said Sasha Naryshkine, an analyst at Johannesburg-based money manager Vestact. For its part, Pick n Pay announced in March a R500m investment in lower prices.

Read also: Pick n Pay’s pyramid structure is collapsed while replicating the previous control structure

“The expectations for Pick n Pay were very high, with anticipation it would capture market share,” Naryshkine said. “Shoprite is a leaner, meaner beast and I think that is where the growth is going to come from.”

The shares fell as much as 6%, the biggest drop since November 11, and traded 3.2% lower at R62.46 as of 12:21 p.m. in Johannesburg. Pick n Pay trades at 25.87 times earnings, compared with Shoprite at 21.10 times earnings.

“Despite all the good work Pick n Pay has done over the last four years, should it be trading at this multiple relative to Shoprite?” Naryshkine said.

South Africa’s economy last year expanded at the slowest pace since a 2009 recession, as food costs surged following the worst drought since at least 1904 and as commodity prices slumped. Shoppers have been hurt by an inflation rate of more than 6 percent, compounded by unemployment of 27%.