UPDATE 1-S.Africa's Pick n Pay returns to profit growth

Tue Apr 15, 2014 9:46am EDT

* Diluted headline EPS 136.5 cents vs 127 cents forecast

* First annual profit rise since 2010

* Results boosted by cost cuts, new stores (Adds CEO, analyst comment)

By Tiisetso Motsoeneng

JOHANNESBURG, April 15 (Reuters) - South African grocer Pick n Pay reported a 25 percent jump in annual profit, its first increase in three years, as new chief executive Richard Brasher's programme of store openings and costs cuts started to pay off.

Once a favourite of investors and customers, South Africa's second-biggest food retailer by stores has trailed peers both operationally and in the stock market due to its late investment in streamlining its supply chain.

But the appointment of Brasher, the former UK head of Tesco about a year ago, is widely expected to help the Cape Town-based company compete better with larger rivals Shoprite and Massmart.

Reporting its first full-year results under Brasher, Pick n Pay said diluted headline EPS rose to 136.5 cents in the year to end-March from 109.6 cents a year earlier.

Headline EPS, the most widely watched profit measure in South Africa, strips out certain one-off and non-trading items.

The growth in headline EPS was far ahead of an estimate of 127 cents, according to Thomson Reuters SmartEstimates, which puts more weight on forecasts from top-ranked analysts.

Brasher said the results - the company's first annual profit increase since 2010 - reflected a focus on price, merchandise and service.

"Because we have a clear and focused plan, we have got a bit fitter and we are playing a bit better. Nothing magical. It's just good, honest shopkeeping," he said in telephone interview.

LONG WAY TO GO

Pick n Pay's performance since Brasher took over has already prompted the company's retired founder Raymond Ackerman to proclaim its revival.

But one analyst said more still needed to be done for Pick n Pay, whose stock is up more than one third since Brasher became CEO, to catch up with its closest rival Shoprite.

"It's far, far too early to say Pick n Pay has recovered. Don't get me wrong, I am fully behind Mr. Brasher's strategy but I just feel it's going to take a long, long time before they get anything like the profit margins that Shoprite has got," said Chris Gilmour, an analyst at Absa Asset Management.

Pick n Pay's operating margin has averaged 3 percent over the last five years, the lowest of nine major South African retailers and half what Shoprite has achieved over the same period, Thomson Reuters data shows.

Pick n Pay said annual sales rose 8 percent to 63.1 billion rand ($6.07 billion), slightly faster than a year ago. On a same-store basis, sales were up less than 3 percent.

The top-line growth rate was nearly three times slower than profit, suggesting much of that increase came from cost cuts which included scaling back dividend payouts, cutting staff and dropping consultants.

Brasher said money saved from the 400 layoffs at head office and regional hubs last year would only show in the 2015 fiscal results.

The muted sales growth highlights an industry-wide downswing as rising fuel and electricity prices, increasing interest rates and high personal debt levels hit consumer spending.

Shares of Pick n Pay, which are up nearly 10 percent so far this month, fell 0.9 percent to 52.38 rand, lagging behind a 0.5 percent decline in the broad All-share index ($1 = 10.4975 South African Rand) (Editing by Erica Billingham)

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