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Johannesburg - Pick n Pay Stores have failed to impress investors with a more than one-third rise in first-half profit on Thursday, the figures overshadowed by concerns about the impact of subdued consumer spending.
Once a darling of investors and customers, the No.2 grocer has lost ground to rivals such as market leader Shoprite [JSE:SHP] in the last few years after failing to invest in new stores, supply chain and paying out much of its profit as dividends.
The appointment about a year ago of chief executive Richard Brasher, the former UK head of grocer Tesco, and his plan to cut costs and open new shops, is widely expected to help the company better compete.
Pick n Pay said headline earnings per share totalled 53.98 cents in the six months ended August 31 compared with 40.81c a year earlier. Headline EPS, the main profit measure strips out certain one-off items.
But sales growth - at about 7% - was at least two times slower than the bottom line, an indication that much of the increase in profit came from cost cuts which include reducing staff and dropping consultants.
The muted sales growth highlights an industry-wide downswing as rising electricity prices, increasing interest rates and high personal debt levels hit consumer spending.
Under pressure
Shares in the Cape Town-based company dropped as much as 6.5% to R49.53 before retracing to trade 4.87% down at R50.75, underperforming a slightly lower JSE All-share index.
"When you have a stock priced for recovery and it is in an environment where the consumer is struggling and everyone is fighting over market share, the share price is bound to be under pressure," said Byron Lotter, a fund manager at Vestact, which does not have Pick n Pay on the list of stocks it recommends.
"To justify their share price at current levels they are going to have to almost quadruple their earnings over a small period of time."
Pick n Pay should be trading around R46 per share based on its most likely earnings trajectory over the next five years, according to Thomson Reuters StarMine.
Its headline earnings per share will have to grow at a compound annual rate of 37.1% over the next five years to justify the current share price, StarMine data showed.
Brasher's turnaround plan, which has been lauded by retired Pick n Pay founder Raymond Ackerman, includes cutting costs, streamlining its supply chain and opening new stores.
"The core business is getting stronger, it is getting healthier and we are improving our financial controls in every aspect and I think that there's plenty more to go," Brasher told investors at the results presentation.
Once a darling of investors and customers, the No.2 grocer has lost ground to rivals such as market leader Shoprite [JSE:SHP] in the last few years after failing to invest in new stores, supply chain and paying out much of its profit as dividends.
The appointment about a year ago of chief executive Richard Brasher, the former UK head of grocer Tesco, and his plan to cut costs and open new shops, is widely expected to help the company better compete.
Pick n Pay said headline earnings per share totalled 53.98 cents in the six months ended August 31 compared with 40.81c a year earlier. Headline EPS, the main profit measure strips out certain one-off items.
But sales growth - at about 7% - was at least two times slower than the bottom line, an indication that much of the increase in profit came from cost cuts which include reducing staff and dropping consultants.
The muted sales growth highlights an industry-wide downswing as rising electricity prices, increasing interest rates and high personal debt levels hit consumer spending.
Under pressure
Shares in the Cape Town-based company dropped as much as 6.5% to R49.53 before retracing to trade 4.87% down at R50.75, underperforming a slightly lower JSE All-share index.
"When you have a stock priced for recovery and it is in an environment where the consumer is struggling and everyone is fighting over market share, the share price is bound to be under pressure," said Byron Lotter, a fund manager at Vestact, which does not have Pick n Pay on the list of stocks it recommends.
"To justify their share price at current levels they are going to have to almost quadruple their earnings over a small period of time."
Pick n Pay should be trading around R46 per share based on its most likely earnings trajectory over the next five years, according to Thomson Reuters StarMine.
Its headline earnings per share will have to grow at a compound annual rate of 37.1% over the next five years to justify the current share price, StarMine data showed.
Brasher's turnaround plan, which has been lauded by retired Pick n Pay founder Raymond Ackerman, includes cutting costs, streamlining its supply chain and opening new stores.
"The core business is getting stronger, it is getting healthier and we are improving our financial controls in every aspect and I think that there's plenty more to go," Brasher told investors at the results presentation.
