The Money Show | Navigating Retail Challenges

In a recent interview on The Money Show Peter Brooke delves into Pick n Pay's challenging situation, marked by a significant share price drop and the appointment of Sean Summers as Chief Executive after 17 years. Brooke emphasises the importance of long-term strategic decisions in the retail sector, cautioning against hasty turnarounds and highlighting the need for evidence-backed changes. 

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Chapters

• 0:16 Bruce Whitfield and Peter Brooke unpack the big news out of Pick n Pay
• 1:13 Is it worth putting money on Pick n Pay?
• 2:28 The challenges facing Pick n Pay with a turnaround
• 4:10 Closing comments from Bruce Whitfield

Transcript

Old Mutual  00:00

The Money Show with Bruce Whitfield is brought to you by Absa Business Banking. With green asset finance to help you invest in solar installation with terms from five to seven years. Absa is a registered FSP.

Bruce Whitfield  00:16

Peter Brooke, the Portfolio Manager at the Old Mutual Investment Group, our market commentator this evening. And Peter Brooke, it's been a huge day. That profit warning from Pick n Pay today, causing the share price to plummet 15%.  Not even the news of the return of the prodigal son of Sean Summers enough to turn around sentiment. At least not today, anyway.

Peter Brooke  00:36

That's right. That is the story of the day, big, big price news. I'm always a little bit suspicious of messiah CEOs. I mean, generally, businesses are run by many people. And I think what's important is the team that you build around them. And... look, the simple challenge is the net margins, nearly a third, roughly a third of ShopRite. So, every year, the capex budget of one versus the other. It's a tough game. And... so, the one person doesn't turn that around immediately. I think they're in for a long haul here.

Bruce Whitfield  01:13

Is it worth selling? If you've got, you know, I don't know, R100 in Shoprite, is it worth selling R10s worth of Shoprite and pulling the R10 in on the never never on Pick n Pay at this point?

Peter Brooke  01:25

That's putting you on the spot a little bit. But I think-

Bruce Whitfield  01:27

Thank you. 

Peter Brooke  01:28

In terms of structurally, I would prefer to back long-term winners, as opposed to looking for turnarounds. Turnarounds are extremely profitable when they come through. So, in our philosophy, there will be a bottom left, bad theme, cheap. And then a turn to good theme as it starts to fire through. One management change looked a little bit... quite frankly, a little bit panicky in terms of you've got extremely bad numbers coming through, suddenly, the family is no longer getting dividends. Right, let's bring somebody in and get change. That is... you need more preconditions for that turnaround, you need to see how they allocate capital over time, you need to see the team that they build, how they invest steadily, and then you'll get more confidence on that turnaround. And then I would be tempted to start to put money across. But only when you've seen the evidence of the change.

Bruce Whitfield  02:28

That's always the risk, isn't it? To get a little bit overexcited in the short term as to something that may or may not work out at all. Pick n Pay is in trouble. There's no doubt about it. Pick n Pay's market position has been corroded substantially. It's gone from being hyper profitable 17 years ago, to being an also ram within the South African food retail sector. It's a proactive step, it's a strong step, it's sending a signal that the, you know, that they appreciate the depths of the problems that they have. And to the point that I think it was that [name] made. This isn't a five-year fix. It may be a 10 or even a 15-year fix. But you don't turn around businesses with 2200 points of presence in eight African countries around in a moment.

Peter Brooke  03:14

This is not even a tough environment. Turnaround, it helps if the tide is rising. And right now, the tide is quite tough. And the other element that I would look at in terms of the turnaround, and this is straight out of my colleague, Arthur Karas'  playbook, it's... you need to look at the balance sheet. And actually, over time, that balance sheet has deteriorated a little bit as they've tried to spend a little bit more on capex while still paying out the dividend, you've actually seen the debt situation move around. So, you've got net interest outflow, which is unusual, often one of the beauties of cash retailers is that you have favorable terms. And just very simply what that means is your suppliers give you 30 days or 60 days and you're selling it out two days later. So, you operate a cash float. So, that normally is very good and it's very defensive. And in this case, they have eroded that. 

Bruce Whitfield  04:10

Peter Brooke, thank you very much for your input this evening. Peter Brooke with the Old Mutual Investment Group on tonight's Money Show, wrapping up what's been an intense half hour of analysis into the appointment of Sean Summers after 17 years. A reappointment as Chief Executive, a move of desperation, a move of concern, a move of worry about the future but certainly one that has been very widely welcomed on my social media feeds. And to every critic, I don't know him, I don't care, I've dug previously in his life. People I think are very positive about the facts. John [surname] saying that he was an ardent Pick n Pay shopper for 30 years, "never go back to the stores, they look old, dingy. Their rewards and prices are no good for their competitors and they need good floor managers. They need to get back to basics". Mpho [surname] says it's a terrible decision. He thinks that Sean Summers is out of touch with modern challenges they face as a retailer. I'd have to disagree with you, having spoken to Sean Summers, and I wish he would have spoken tonight but he is constrained by a closed period, but we'll get him on the radio, Mpho, as soon as possible to test that hypothesis on him. The guy is raring to go, he is champing at the bit and ready to go. And ja, I think most people are quite enthused by the line "I want people to drive to work faster than they drive home" and he wants to bring fun back into retail. So, look, when I said to him does he have any particular message for the guys at Shoprite, does he have any particular message for the guys at Shoprite? He said, "Well certainly it's not going to be one way traffic anymore". He acknowledges the difficulties that Pick n Pay has faced and is looking ready to fix them. Is he the right guy? Time will tell.

Old Mutual  05:55

The Money Show with Bruce Whitfield was brought to you by Absa Business Banking. With green asset finance to help you invest in solar installations with terms from five to seven years. Absa as an authorized FSB and a registered credit provider. T's and C's apply.