The South African retail sector, a pivotal player in the nation’s economy, faces a complex web of challenges and opportunities.
Despite being the third-largest sector in the country, recent hurdles have impeded its growth trajectory. Eskom’s power disruptions have cast a shadow, dampening the sector’s momentum. Compounding this, the ripple effects of the Russia-Ukraine conflict have reverberated through supply chains, fostering inflationary pressures that have tested consumer resilience.
Stats SA’s report revealed a concerning trend, with a second year-on-year retail sales decline of 0.9% in June 2023. However, a silver lining emerges amidst these challenges. With South Africa’s inflation cooling to 5.5% from a peak of 7.63% YoY in Q3 2022, potentially signalling a plateau in interest rates, a hopeful window materializes. This shift might empower consumers, fostering improved spending habits and potentially revitalizing the retail landscape.
Source: Trive – TradingView, Nkosilathi Dube
Technical
Among the major South African retail stocks serving the food retail market, giants like Pick n Pay (PIK), Shoprite (SHH), Spar (SPP), and Woolworths (WHL) witnessed a tumultuous first half of 2023, with investor confidence waning amidst declining market values.
The sector grappled with subdued consumer spending amid soaring inflation and elevated interest rates, triggering a notable sell-off. However, the latter half of the year painted a different picture. These stocks staged a noteworthy rebound, marking gains ranging between 1% and 20% for most, except for the outlier, Pick n Pay, which shed nearly 60% of its market value and stood apart from the pack.
Source: Trive – TradingView, Nkosilathi Dube
Fundamental
Pick n Pay, a significant player in South Africa’s grocery landscape, weathered a formidable storm with a staggering 60% share plunge in 2023, stemming from a nearly R600 million loss in the half year of fiscal 2024.
The company found itself grappling amidst cutthroat competition, trailing behind retail giants Shoprite and Woolworths. These industry leaders tactfully utilized discounts and precise targeting strategies, bolstering consumer spending on their offerings and further squeezing Pick n Pay’s market standing.
Amidst a challenging landscape, Pick n Pay faced multifaceted hurdles. The burden of record-breaking load shedding, escalating operational costs, and a staggering 14% food inflation marked the highest in 14 years. Concurrently, interest rates surged to their highest point since 2009, amplifying pressures on already strained customers.
Source: Trive – Koyfin, Nkosilathi Dube
Pick n Pay faced a notable downturn in its EBIT margin, sliding from 2.98% to 1.08% within a quarter, signalling a concerning shift in profitability. The sharp decline stemmed from a significant 14% surge in operating costs, exerting immense pressure on their earnings. Interestingly, only Spar group experienced a similar setback, whereas Woolworths and Shoprite managed to navigate this challenging terrain relatively unscathed.
Source: Trive – Koyfin, Nkosilathi Dube
Pick n Pay’s inventory turnover of 8.8x signifies a different approach to managing its inventory compared to its peers. While it trails Spar’s notably high turnover of 19.9x, it surpasses Shoprite and Woolworths. This metric measures how efficiently a company is managing its inventory—the higher the turnover, the quicker goods are sold and replaced. Pick n Pay’s ratio indicates a moderate pace, striking a balance between inventory control and ensuring product availability. Spar’s exceptionally high turnover could reflect rapid sales or leaner inventory management strategies. The company’s approach to inventory turnover reflects its unique operational and market dynamics in the competitive retail landscape.
Source: Trive – Koyfin, Nkosilathi Dube
Pick n Pay’s Price-to-earnings (P/E) ratio, standing at 73.70x, portrays a comparatively higher valuation relative to its earnings compared to peers. This elevated ratio signifies that investors are willing to pay a premium for Pick n Pay’s earnings compared to Spar, Shoprite, and Woolworths. Such a high P/E ratio might indicate heightened investor expectations for future growth and profitability.
Summary
Within the competitive retail sector, Pick n Pay stands as a notable contender facing a distinct set of challenges. Despite a staggering share plunge and profitability concerns, its resilience in maintaining buoyant turnover reflects its robust market positioning. However, with a notably higher Price-to-earnings ratio compared to peers, investors could exhibit confidence in Pick n Pay’s future growth potential, potentially indicating optimistic projections.
Sources: Reuters, Statistics South Africa, Deloitte, KPMG, BusinessDay, TradingView, Koyfin
Piece Written By Nkosilathi Dube, Trive Financial Market Analyst
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