Pick n Pay technically insolvent, but new strategic plan will turn the ship

The latest results of retailer Pick n Pay indicate that it is technically insolvent because its liabilities exceed its assets for the first time, but the implementation of a new strategic plan developed by new CEO, Sean Summers, is already starting to turn the ship.

According to Pick n Pay’s audited results for the year ending 25 February 2024, the retailer’s revenue increased from R109.28 billion to R115.37 billion, while trading expenses rose from R20.15 billion to R22.55 billion. Total liabilities exceeded total assets by R183 million.

Pick n Pay’s total assets were R46.51 billion and its total liabilities were R46.69 billion. The retailer reported a 373% decrease in its net profit, decreasing from a profit of R1.17 billion to a net loss of R3.2 billion.

There was also a loss in earnings per share, with basic earnings declining from 243.37 cents per share in 2023 to a loss of 661.67 cents.

Interest-bearing debt, which rose by R5.7 billion from the previous period, was the largest contributor to the retailer’s increased liabilities, while its interest on debt costs was R2.4 billion a year.

The company’s net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortisation) increased from 1.1 times to 6.3 times, which means that Pick n Pay breached all of its debt covenants. It exceeded its leverage ratio covenant with net debt-to-EBITDA at 6.3 times, way above the covenant threshold of 2.75 times.

In addition, the retailer breached its second debt covenant, which states that Pick n Pay’s EBITDA must be at least 3.5 times greater than the net interest expense, but its EBITDA is only 3.2 times greater than its interest expense.

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No Pick n Pay dividend for 2024 as a result

Therefore, Pick n Pay’s board decided not to declare a dividend for the 2024 financial year and has suspended all dividend payments “until the board believes that there is sufficient cash generation to review the dividend policy”.

Chairperson Gareth Ackerman said at the results presentation there were attempts to streamline and refocus Pick n Pay for many years as the operational structures were unwieldy and needed modernisation.

“As a result, the business embarked on a centralisation project to keep up with the rest of the industry. However, it became evident in the post-pandemic era that the work done over the previous decade had not resulted in a sustainable model for our core corporate stores. The profit recovery lulled us into a false sense of security.”

He said the impact of several “black swan” events, coupled with certain inappropriate strategic initiatives, caused a precipitous decline in the profitability of Pick n Pay’s supermarket business. However, he said, the retailer was not unique in having to face these external problems, as all retailers did.

“It would not be honest to shift the blame to external factors entirely. The success of the Boxer, Rest of Africa, VAS and clothing businesses carried Pick n Pay and also provides a strong foundation for the recovery of the overall business.”

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Elements of 2022 strategic review did not work

In 2022, the management of the company undertook a strategic review of the business, Ackerman said. “As part of the resultant Ekuseni strategy, liabilities relating to both the core Pick n Pay supermarket business and the Boxer, Rest of Africa and the clothing business were converted to long-term debt and capital was raised to support the strategy.

“However, it became evident that key elements of the strategy were not working in the core supermarket business. The problem was correctly diagnosed but the solution was strategically flawed. Fortunately, it was only nine months after the launch of Ekuseni, that the board took immediate and decisive action.”

Summers was brought back as CEO and he rapidly rebuilt the team using a number of current, new and former executives in their areas of expertise. Ackerman says for Pick n Pay to survive and thrive again, it needs to embark on a fundamental step change, with new ideas and dynamic leadership.

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“Pick n Pay needs a vibrant management team in place to continue the turnaround in 2027 and one of Sean’s key KPIs is succession.”

Ackerman said given the position of the retailer the board elected to do a R4 billion rights issue that will be followed by an IPO of its Boxer business, hopefully by the end of 2024. “The board believes this is the best approach to reinvest in our company, re-capitalise the business and reduce debt. This will enable our management to start investing back into the business for growth.”

Plans to restore profitability in Pick n Pay supermarket business

Pick n Pay CEO, Sean Summers, unveiled the new board-approved six-point strategy to restore the Group’s core Pick n Pay supermarket business to profitability.

The new Back-to-Basics strategy has six priorities and will focus on simplicity, quality, affordability and sustainability to help the iconic brand reclaim its former glory. Given the market environment, it is a reasonable and actionable plan.

More importantly, the right operational team with the right experience is now in place to execute it, according to Pick n Pay.

Important parts of the plan have already been implemented, some in place since February, with encouraging early results.

For the first 10 weeks of the 2025 financial year, positive like-for-like growth has been recorded by Pick n Pay, alongside a consistently strong performance from Boxer.

The six strategic priorities are leadership and people, resetting the store estate, Improving the offer to drive sales, optimising the operating model, recapitalisation and leveraging the strength of partnerships.

“This is a three-year turnaround programme. We will work with vigour, energy and passion to get it right. We have a strong operational leadership team to help us set the business on a path of long-term sustainability,” Summers says.