Thank you, and good morning, and welcome to everybody, those present here in the room today, and those of you joining us online. Good morning on this beautiful Monday morning. The opportunity to share with you our results and the progress to date again. I can say that when we have a look at where we find ourselves currently at the moment, and we all understand that the marketplace that we're in currently in South Africa is a severely constrained marketplace. We have a consumer that is under extraordinary pressure. The outcome of all of the uncertainties in the Middle East. We all talk about a black swan event. None of us anticipated an orange swan event that has had a profound effect on the world and the outcomes.
It really has played out in the most unfortunate way for those people in our communities who can afford it least. But having said that, it's played out right across the marketplace. It's against that background that we have to have a look at where we are in terms of our journey that we're on, not quite sure what that feedback is, in terms of the journey that we're on and the progress that we are making. I'm very pleased with the fact that we've continued to narrow the gap and the losses, and Tina will get into the numbers in a lot more detail later.
But I think as a perspective, maybe one of the things that I should perhaps have called out a little earlier in my time back here is that it stands to good logic if you think of it, that life is sequential at the end of the day. For most of the people in this room here today and those watching the podcast, the focus is very much on the outcomes and the return to profitability, and that is uppermost in all of our minds, obviously. But the truth is, we have to solve for our customers first. We have to solve for the company and the people first. It's once that gets its momentum and starts to rebuild that momentum again, then the outcomes flow, then the profits will flow.
I'm never comfortable, but I am confident that where we find ourselves now is predictable as to where we are currently. When we have a look at the journey going forward now and all of the plans that we've put in place, I have absolutely all of the confidence in the world that we are going to get to where we need to get to in Pick n Pay. That is to ensure that Pick n Pay does become a beautiful, sustainable, profitable enterprise that can play its role in society and the broader society in South Africa, and look after its customers and look after its people. Our customers are choosing us more and more at the moment, and we'll get into a bit of the detail later.
But if you just have a look at where Pick n Pay is positioned today compared to where it was two years ago, we are showing up. If this was not the case, we would not be showing the positive growths that we are showing currently at the moment. If the market would be a little bit more kind to us, and we could get some stability in the Middle East, that would obviously help us even more. Our fantastic Boxer business continues to perform just amazingly. Its 600th store opened, and Marek and his team continue to perform. Again, in a market that has had its share of realities it has had to deal with, along with some deflationary pressures in a lot of the major categories in which it trades. But a strong performance in Boxer.
If we just have a look at where we are in Pick n Pay. We have a strong balance sheet at the moment. We have got in excess of ZAR 10 billion of cash on our balance sheet, and it is cash that we look after very carefully. We know that we still have some cash to burn in terms of the turnaround and getting to where we need to get to, but that is all part of our plan going forward from here. Without any further ado, I will hand over to my new Chief Financial Officer, Tina Rookledge. Tina, welcome. Up here. This is Tina's first rodeo, as they say in the classics in Texas. I am going to sit in the front here and mark it. Over to you.
Thank you, Sean. It is quite interesting that when I joined Pick n Pay, well, I have been here for 82 days now. Sean has said I came from a ballet, but now I am in a cowboy in a western, so I must make sure I am ready for this ride. But good morning to everybody that has joined us here in person today, as well as those on the website. As I said, it has been 82 days in this role, but what has struck me the most about in these 82 days is the commitment and dedication of Team Pick n Pay. There is a real determination to turn this business around. The energy and focus that people arrive with at work every day is something that has really stood out to me.
But we are all under no illusion that there is still a lot of work that still needs to be done.
But we are encouraged by the progress that we are making each and every day. With that, let me get on to the financial performance for the half. At a group level, we have increased turnover by 2.4% to ZAR 60.5 billion, with like-for-like growth of 1.8%. Boxer delivered sales growth of 6.3%, while Pick n Pay's sales growth was broadly flat. We continued to make good progress on our gross margin, which increased by 70 basis points to 18.8% with both Pick n Pay and Boxer contributing to this improvement. The stronger gross margin flowed through to profitability. Group trading profit increased around ZAR 180 million to ZAR 500 million, with ZAR 105 million of that coming from Pick n Pay and the remaining ZAR 75 million from Boxer. Importantly for us, this improvement was at an operating level.
Our loss before tax and capital items reduced by 56.2% to ZAR 139 million, while net finance costs remained fairly constant year-on-year. This flowed through to the bottom line with the headline loss reducing by 31.9% to ZAR 299 million. This is after taking into account the non-controlling interest in Boxer. It is worth noting that the Boxer non-controlling interest increased during the year following our 12.5% sell-down of our investment in Boxer. Finally, we have ended the period in a strong cash position with ZAR 10 billion on our balance sheet. This is up from ZAR 6.9 billion in March 2026. If I then move on to our turnover. The retail, as Sean said, the retail environment remains challenging. Consumers remain under pressure, and that pressure was compounded by the fuel increase in May. At the same time, food inflation is at a 16-year low.
That is clearly good for consumers, but it does create a more challenging top-line environment for us as retailers. Consumers remain highly focused on value and are increasingly prepared to shop around for the best prices. Against this backdrop, both Pick n Pay and Boxer delivered credible turnover growth during the period. If I just turn specifically to Pick n Pay, Pick n Pay turnover was broadly flat at ZAR 36.4 billion, with like-for-like sales growth of 2%. In South Africa, sales were down 0.5%, while like-for-like sales grew by 1.4%. The difference between these two metrics largely reflects our store estate. That store estate reset is now complete. Although the closures over the past 12 months continue to create an effect in our reported sales growth. If we look forward to our company-owned supermarkets, like-for-like sales grew by 2.4%.
It was very much a tale of two quarters for us, with a clear slowdown once the fuel price increased in May. But we are happy that we delivered positive like-for-like volume growth of 0.9%. This is a very important indicator to us because it reflects the exceptional work our operational teams do to improve our customer offer. We are doing this while remaining competitive on price. Our internal selling price inflation was 1.5%, which is below current CPI food inflation of 2%, and this reflects our continued focus on value for our customers. Our franchise business also showed an improving trend. Sales grew by 1% compared to a 0.2% decline in the second half of FY 2026. We continue to work closely with our franchise partners to make sure that we strengthen our customer proposition to improve both sales and profitability.
Omnichannel remains our strongest growth engine, with sales up 35.4%, and we continue to invest in differentiating our digital proposition. During the period, many of you will know, we launched Penny, our AI-powered conversational shopping assistant, which has already supported higher average order values. We also launched clothing on asap!, as well as launched a new clothing website. For us, this is important because it brings both grocery and clothing together in the same digital ecosystem. If we just turn briefly to clothing, standalone stores delivered growth of 3.9%, with like-for-like sales declining by 0.7%. While like-for-like sales remain negative, the trend has improved on what we saw in the second half of H2 in FY 2026. Our focus in clothing is firmly to return this business to positive like-for-like sales growth.
While restoring stronger sales growth remains a key priority, we are encouraged by the underlying performance we are seeing in all areas of the business. This momentum has continued after period end with the South African supermarket like-for-like growth sales for the first four weeks of H2 running slightly ahead of the levels achieved in H1. If I now move to trading profit. At a group level, we increased our trading profit by 58.1% to ZAR 490 million, an improvement of around ZAR 180 million on last year. Both businesses contributed, as I have said before, with Pick n Pay contributing ZAR 105 million and Boxer contributing ZAR 75 million. The Pick n Pay trading loss reduced by 16.9%, with trading margin improving from -1.7% to -1.4%. Boxer, meanwhile, continued to deliver strong profitability.
Trading profit increased by 8.1% to around ZAR 1 billion, with the trading margin improving by 10 basis points to 4.2%. This is achieved in spite of a constrained consumer environment. If I just look at Boxer, I am not going to really touch on the Boxer highlights. This was covered by Marek and the team last week in the presentation. What I do want to call out is that we have continued to deliver profitable growth while investing behind its longer-term expansion plans. Focusing now more on the Pick n Pay segment. The key feature of this result is the continued improvement in the earnings trajectory. The Pick n Pay segment reported a trading loss after leases of ZAR 1.1 billion, an improvement of ZAR 100 million when compared to the prior year.
Yes, there is clearly still work to do, but at the same time, the strength of our balance sheet has improved. We ended the period with a healthy cash balance of ZAR 7.7 billion. This gives us the confidence and flexibility to continue investing in the turnaround initiatives and to make the right decisions for the long-term health of this business. We are no longer financially constrained. Now what we need to do is focus on the operational elements of our business. If we then look at the trading result, reflecting on the Pick n Pay segment trading results, as I previously discussed, the turnover is broadly flat year-on-year at ZAR 36.4 billion. Despite this flat turnover, gross profit grew by 3.9% to ZAR 6.4 billion. This reflecting the 70 basis point improvement in the gross margin to 17.5%.
At the same time, we managed to help keep a tight rein on costs. Trading expenses increased by just 1.7%, with like-for-like expense growth of 2%. This is broadly in line with our like-for-like sales growth. For me, this is one of the most important measures in this presentation today, that during the period, our gross profit grew ahead of expenses. The operating leverage is starting to come through in the result, and this is evidenced by the trading loss reducing by 16.9% to ZAR 500 million, and the trading margin improving from - 1.7% to -1.4%. If I then just unpack the gross profit analysis for Pick n Pay, as I said before, the gross profit margin improved by 70 basis points to 17.5%, with gross profit increasing by 3.9%, despite flat turnover. This improvement was both in South Africa and the rest of Africa.
South Africa contributed 40 basis points to the margin improvement, and this was supported by better category management and margin improvement. We are seeing encouraging progress in our fresh and general merchandise divisions, with improvements in both participation and margin. Important for us is that we achieved this margin improvement while remaining competitive. Our selling price inflation remained at just 1.5%. We continue to invest in value while improving our range and our quality of our customer offer. The remaining 30 basis points came from the rest of Africa, primarily from Zambia, but also from the corporatization of our Botswana operations. Diesel, however, remains a significant cost headwind for the business. For the segment, spend increased 14.9% to ZAR 426 million for the period.
In South Africa alone, our diesel costs were up 22.5%, but this was partly offset by lower diesel costs in Zambia due to the end of load shedding in that country. If I now move on to trading expenses, as I've said, cost discipline remains a critical part of the Pick n Pay turnaround strategy, and we're seeing good progress. Trading expenses increased by just 1.7% to ZAR 8.1 billion, with like-for-like expense growth of 2%. This is a significant improvement on the prior year, where like-for-like growth of 6.7% was reported. What's driving this better cost performance? If we start with employee costs, our largest expense category at ZAR 3.4 billion, cost increased by just 2.7%, despite above-inflation wage increases at a store level. These savings, the savings from our support office restructure, are coming through and helped absorb a significant portion of these wage increases.
We're also seeing benefits in the work we've done in our store estate. Occupancy cost declined 0.4%. That was supported by rental renegotiations and lower insurance costs. As leases come up for renewal, we continue to rightsize our estate for a better match to our business needs. Occupancy costs also benefited from a ZAR 99 million profit on lease termination compared to ZAR 126 million in the prior year. Merchandise and administration costs were down 5%, reflecting our continued cost discipline and included a more strategic approach to advertising and promotional spend. These savings were partly offset by operations costs, which increased by 5%, and these are driven mainly by higher diesel costs, electricity costs, utility costs, as well as costs associated with the growth in our omnichannel business. Moving on to finance costs. Our finance costs were broadly flat at ZAR 400 million, increasing just 0.3% year-on-year.
Our stronger cash position is now benefiting our funding interest, although this was offset by a 3.1% increase in our IFRS 16 interest. Our balance sheet at the end of the period is strong. We ended with ZAR 10 billion of cash, of which ZAR 7.7 billion comes from Pick n Pay and ZAR 2.3 billion from Boxer. This cash position includes ZAR 4.7 billion of gross proceeds from the sale of our 12.5% shareholding in Boxer. But the improvement in cash is not just from the Boxer transaction. Excluding these proceeds, the Pick n Pay net cash position improved by around ZAR 600 million during the half, including the ZAR 232 million dividend from Boxer. But excluding the benefit of the Boxer sell-down, we still saw a meaningful improvement in the underlying cash position of the business.
Turning to working capital, inventory reduction was a key focus area for us at the start of the year, and we are seeing good progress. Our inventory reduced by 3.2% year-on-year to ZAR 6.7 billion. This was achieved by continuing to invest in range. We also managed to protect both availability and our customer offer. Receivables were also well-controlled, reducing by 9.3% to ZAR 3.4 billion, largely reflecting the corporatization of 10 franchise stores during the period. The reduction in inventory has released cash and has contributed to the strength of our liquidity position for the half. Overall, the group generated ZAR 2.7 billion of working capital inflow for the period, compared to ZAR 1.7 billion last year. Pick n Pay contributed ZAR 1.4 billion of that with a further ZAR 1.3 billion of that coming from Boxer.
As you would expect in retail, there is seasonality in our first half working capital cycle, and we expect a portion of this benefit to unwind in the second half. The full ZAR 2.7 billion should not be extrapolated for the year. If I now move on to capital expenditure, we continue to be disciplined and targeted in how we allocate capital across the group. Group net capital investment for the first half was ZAR 700 million compared to ZAR 900 million in the prior period. This consists of gross capital investment of ZAR 900 million, less approximately ZAR 200 million from the proceeds of asset disposals. Within the Pick n Pay segment, gross capital investment increased by 20% year-on-year to ZAR 583 million as we increased our investment in our supermarket estate. Net capital investment was up just 5%, thanks to the increased proceeds from the property disposals.
Our investments remain selective with strategic store revamps prioritized alongside critical repairs and maintenance. We have also invested in selected franchise to corporate store conversion where it is strategically and financially appropriate for us. Looking ahead, capital investment will step up in the second half, consistent with the planned capital investment program. For Pick n Pay specifically, our FY 2027 gross CapEx guidance remains unchanged at ZAR 1.7 billion. Bringing the cash story together, we started the year with ZAR 2.4 billion of net cash. Cash flow from operations after lease payments was an outflow of ZAR 800 million, and this reflects the fact that we are a loss-making business. The outflow, however, was more than offset by the progress we have made on working capital. Working capital released ZAR 1.4 billion of cash with a further ZAR 200 million benefit from net funding interest.
At the same time, we continued to invest in the business with net capital investment around ZAR 400 million during the period. Putting this all together, Pick n Pay generated ZAR 400 million of positive operational free cash flow, taking the net operational cash position to ZAR 2.2 billion, and that is before the Boxer transactions. As I have said before, we received ZAR 232 million from Boxer in the form of a dividend, as well as we sold down on 12.5% of our shareholding, which yielded ZAR 4.7 billion. As a result, Pick n Pay ended the period with ZAR 7.7 billion of net cash, giving us a strong financial position from which to continue executing the turnaround. Finally, turning to earnings per share. The group loss for the period reduced by 88.2% to ZAR 38 million.
Following the increase in the Boxer minority shareholding from 34.4% to 46.9% during May, the non-controlling interest increased by 34.1% to ZAR 232 million. The loss attributable to the Pick n Pay Stores shareholders reduced by 45.6% to ZAR 270 million. After headline adjustments of ZAR 29 million, the headline loss reduced by 31.9% to ZAR 299 million. The weighted average number of ordinary shares remained unchanged at ZAR 734 million. Our headline loss per share improved by 31.9% to ZAR 0.4071, while our basic loss per share improved by 45.6% to ZAR 0.3677. In concluding, as a team, we are encouraged by the progress we are seeing across the business. The turnaround is gaining momentum. Profitability is improving, underpinned by a strong balance sheet and cash position.
There is still work to do, but the plans are in place, the priorities are clear, and our focus is firmly on executing and returning Pick n Pay to profitability. Thank you.
Thank you very much, Tina. Straight out the blocks, 10 out of 10. Presentation and passion. The room will stand in judgment of the numbers, but you can see that there is certainly a lot that has been happening under the hood in the organization. This is not just about any one lever that sticks out. There are so many, many things that we are busy tackling at the moment. If I can just get into some of the detail of where we find ourselves at the moment. I spoke earlier about our like-for-like sales growth. On the right-hand side, we will not get specific about naming retailer A, B, and C, but the most important thing for us is that our customers are coming home to Pick n Pay. There is absolutely no doubt about it. People ask why.
Given the constrained market that is out there, a lot of the work that is being done, if we look at, for starters, obviously, a major thing is the Springboks sponsorship and the event and the effect that that has had. The overall halo effect on the company has been extraordinary. It has been absolutely fantastic. If you look below that, all of the work that has been done, like in women's rugby, in schools rugby, we had the Gold Cup this weekend. Just extraordinary activation and Pick n Pay really getting back to what it stands for in community. We just have a look at our marketing, the consistency of the Pick n Pay marketing and execution today. The blue stripes that are out there, it is just so easily recognizable and identifiable.
All of these things are about building blocks and about getting us back to where we need to be. We spoke a bit earlier about food inflation and some of the challenges that we've had to deal with in this year past, and we mustn't for any second underestimate the effect of what this has on our business. For Boxer, for example, on the major categories that are there, on all of the cereal categories and stuff, we've in fact had deflation. Despite that, we've managed to achieve what we've achieved. And the fantastic thing about the deflation that is there is that it certainly does help consumers, specifically at the bottom end of the marketplace, who really are constrained. So with mealie meal and rice and all of those things are less 30%, less 40% than they were last year.
A packet of potatoes, less than half in a year. It's fantastic for the consumer. It's great because it helps them in these times, but it certainly brings added pressure to retailers as an operator. One of the major things that we've spoken about, and one of our major focuses in the company for Pick n Pay going forward, is fresh. Everybody says, "Well, Sean, how are you really going to call out Pick n Pay as being the fresh food people and working towards getting back to what we were always known to be, the fresh food people?" I can just tell you that the progress that we've made in these areas has been nothing short of phenomenal.
If we look at the traditional area of the business, so sort of the ads and the non-ads, your household and packaged grocery goods, there are so many new competitors playing in that space today. You've got a lot of your direct online competitors, the Amazons and the Takealots of this world, that are competing actively in this marketplace. And fresh food for us is really the major focus for us. And between Peter and the team, we've got Dallas here today as well. If I have a look at the retail operational side of Pick n Pay and how that capability is growing day, on day, on day, it really is rewarding and heartening to see. And we're busy with a lot of new innovations in this space.
If you just reflect for a second and you think about the South African consumer and the market that we operate in here, we have of the best retail in the world in South Africa. In turning Pick n Pay around and getting it back to where it needs to be, I can tell you now, there is no grocery consumer in any country in the world that gets what they get out of us supermarket operators. And here I have to call out our opposition as well, with Sixty60. Between Sixty60 and asap!, what we provide to our consumers in this country is absolutely world leading. It's world leading and world-class. We run proper supermarket operations in this country. We can have a look at our Penny has been absolutely phenomenal for us, and the initial uptake of that, and that certainly was groundbreaking.
Clothing also, and our clothing business continues to now grow in the asap! environment and continues to add to that. One of the great innovations that we're having within Pick n Pay now is that we are in the process now of launching Smart Shopper Pro, which means it's a subscription. This is being rolled out at the moment. So for a fixed fee per month, unlimited deliveries, and that will also grow asap! into that space. When you have a look at the numbers and the beneficiation, and you look at things like stock productivity and all of the numbers that are starting to come down, the curtailment and the control of expenditure, and you know here I must call out the operational people in the room. Across the length and breadth, both at a store operational level, and here in the support office level.
The things that we've been talking about right-sizing, about doing all of this, if we hadn't have been doing that, they wouldn't be showing in the numbers that we put up on the screen now. We really have made some incredible progress in this regard. Our huge facility that we have in Eastport is all done and dealt with. It's moved off to DP World, and we've got some really great innovations that are coming out for us in this space. We're busy sorting out our distribution along the coast, specifically in the Eastern Cape area, where we're busy with DP World at the moment and looking at how we're going to evolve that and make that more effective for us, and then also creating some additional capacity in the KZN region. But under Johan's guidance there, we really have made some fantastic progress.
Look how beautiful that truck looks. It's extraordinary. I suppose one of the major issues that it really is great to share with you today is the fact that we settled last week, the ongoing labor negotiation that we were having. To just put this into context, some 2. 5 years ago, we already worked out that just purely from a packaging benefits perspective at a store operational level, that we were in a situation at Pick n Pay that we could no longer compete in a really cutthroat, tight margin, volume business such as we operate in this world. For about two years, we had tried to move the dial in this regard, and respect to the negotiation body, they'd done a good job of not moving at all.
We were left with no option other than to actually trigger the Section 189 process. Just very quickly, for those people who don't understand, we are actually obliged to, in law, if we contemplate, due to business necessities, any retrenchments that may result, you are actually obliged by law to enter into a s189 process. It doesn't automatically mean retrenchment, because what the 189 process does, is it calls upon you to look at alternatives to retrenchment. So it was a serious situation for us when we had to announce some 5. 5 months ago now that we were going to be launching an s189 process and take 22,000 people in Pick n Pay that we love, and that they love Pick n Pay, and put them under this sword of Damocles that something has to happen.
We know that we had various interventions that happened in the interim, and there were certain court actions that were taken against us. We were taken to both the Labour Court and to the CCMA, and fortunately, we won both of those resoundingly. It was one of the issues that really brought some common sense into the room, that we could realize, stuff is real. Stuff is real. We need to sit down and we need to talk about this calmly. We need to talk about it quietly, and we need to get to resolution on it. I want to call out specifically our national negotiating committee, who are our body of shop stewards across the country, who've been involved in this five-month process. Then also Dallas, who heads up our retail operation, along with Paul and Mike and Jeff.
It's been extraordinary how they've got together many, many long hours, many, many late nights, but finally found resolution, because that's the most important thing at the end of the day. I'm very pleased to be able to say that last week we could officially announce that the s189 had now been withdrawn, and we have taken that off the table, and now we will move to giving substance to what we've agreed is going to be the changing terms and conditions going forward. For clarity, we're not going to be disclosing the detail of that in public. I know that we live in a world today where everybody loves to know everything, but there's certain things in life that you need to know, and there's certain things in life that you won't know.
This is confidential between us and our labor force in the company, and we will move into it. We live in a competitive world. If we have a look at clothing, we know that clothing in general across the length and breadth of the country, I make no bones about it, has been under pressure. We haven't had a stellar two-year trading period in clothing. But we can already see that the work that Hazel and her team have started to put into place now is starting to get us back the right way around again. There's been a lot of pressures in that marketplace. If we take the advent of the likes of the Sheins and the Temus that have been flooding into the marketplace as well, that's also had an effect on everybody. You can see it's across the clothing and apparel universe.
We would be foolish to believe that we somehow operate somewhere else. We don't. Our partnerships in the company are very, very important for us. In this regard, we obviously know we have our FNB eBucks, we have our beautiful Absa, our banker sitting in the right-hand side of the room over here. We have work that we're busy doing at bp Express at the moment, and we're busy making some evolutions there, and making sure that we get to service that piece of our business better. Then we have the wonderful CollectaBoks that have kicked off again. I don't know if you've all seen that cute little advert of Siya trying to use a connection to get his cards and being told you have to go and shop in Pick n Pay, Siya, if you want to fill up your CollectaBoks.
But it is just extraordinary how fantastic this program is. People just flood in there for these things. It is amazing. Absolutely amazing. Boxer, as we said, and I am not going to go into too much detail here, because Boxer was spoken for last week by Marek and the team. Other than just to say that on the Boxer succession, we have made the announcement that Marek will step down in March. He will still be in Boxer and available in Boxer until November next year. So with Justin, who we have appointed as Marek's CEO designate. Justin has been in the business for 15 years. He is well experienced across the length and breadth of the business. So that is all put in place. And Boxer has a very, very strong leadership team across the business that has been grown up over all of those years.
So if we have a look at where we are, and this is a slide that we put up some two years ago in May when we said this is the journey that we are on in Pick n Pay. If we have a look, pretty much the recapitalization, leadership and people, resetting the store estate and strengthening of partnerships continues. The big things that is still under work is accelerating like-for-like sales, and that is something that we do daily in everything we do, whether it is ranges, fresh, whatever it is we do there. Then on the future fit structure. And future fit structure, a lot of that was about making sure that we get the right terms and conditions in place at store level, and we will now get that action then in place. So that is certainly work on the go at the moment.
And that brings me to the last piece of my presentation, and that is my succession in the company. We announced a few weeks ago, that Spencer would be joining us effective from the 1st of February next year, as part of succession. And I know that there is a lot of conjecture about internal, external, all of these things. We need to understand that in an organization like this, we have incredible operational teams, but we are still in a situation in this company that we need to continue to strengthen our ranks of management in the organization. As Pick n Pay over the years found itself just having to operate on less and less and less people.
And we have the most extraordinary operational situation under Dallas's leadership now, where we have our core retail business that is growing in Pick n Pay, and that is still the big nut that we need to crack. And we cannot afford to take focus off that. We cannot afford to be driven in what we achieve in that regard. And I made the commentary not somewhat lightly, but somewhat seriously, about the roles of leadership and being CEO in an organization like this today, is not clearly understood by people out there. There are so many dynamics that one has to deal with that are outside of actual day-to-day trading.
There's sometimes when you go home and you're like, "Hell, I would just like to get to stores and just be passionate about what we do, and that's look after people and sell more product." There's some days that you go home at the end of the day and you're like, "Man, it's just too much stuff that one has to deal with." But that's the world that we live in at the end of the day. We're very, very blessed to have somebody of Spencer's experience coming to join us after a fantastic career at, W something. They're very sensitive about us using their name. But we're very, very fortunate that Spencer, at the end of his time there, went to go and work in New Zealand, and went to go and work for Woolworths New Zealand, which has obviously nothing to do with Woolworths South Africa.
In Woolworths New Zealand, that business was in fact half corporate, half franchise, also about 22,000 executives or employees in the business, and a very, very tough time in New Zealand. Spencer had to face into government, because the supermarkets, like in Australia, were blamed after COVID for a whole lot of woes and ills. So an extraordinary amount of experience out there of dealing in the corporate world, and having to deal with the bits and pieces that one needs to deal with. I think that for us, the continued strengthening of Pick n Pay's leadership and the continued strengthening of the quality and the depth that we have in the organization, for me, is of vital importance. Vital importance. Because this company is only about its people at the end of the day. This is not about one person.
It's about a team, and it's about the people across the length and breadth of the company. It's extraordinary. When you go to store openings now, and you just have a look at the spirit that's there, you have a look at the people that are there. It's palpable. I consider myself very fortunate and very blessed to be here at this stage and at this juncture now. As I've said, Spencer will join 2nd of February. Everybody's asking, "Oh, why so long handover?" All of this stuff. No. It's properly planned. Over a period of four, six months, Spencer will deal with the handover as Spencer moving in, and then I'll also be in a situation that I can spend a little bit more time with Justin and the Boxer team.
As you know, Boxer is very, very close to my heart, and it's a crucial part of this business. But there is no confusion in our lives of the fact that Boxer has an independent board, and that Boxer does what is right for Boxer. Other than one thing. Marek and them do not like to pay for the stores that we pass on to them. I wish we could decree that this would be the amount that we pay, that they pay for them, but that doesn't happen. They negotiate and they drive a hard bargain. Boxer run their business and they run it well, and we will continue to run our business and run it well. The crucial thing for us is to ensure that the operational people in this company can focus on what they do, and that's look after the business.
On that note, I would leave you with a few key thoughts and the real takeaways from where we are at. If I had to leave you with three real key pull-outs of this thing. One, customers are returning to Pick n Pay. We can see it in our like-for-like sales. This is not delusional in any way, shape, or form. We can see it in our like-for-like sales. The second thing is that we have dealt with our labor situation, and I think that this is a massive feather in the cap of everybody in this company, and specifically our people in the company. We had a program of fairly regular updates where we did a little video.
I did a video that went out to the company every couple of weeks, just appraising them of where we are at, why we are doing these things, how we are going about it, just to keep the heat out the room. That is where we have got to on the labor front. I think against all odds, and I do not think many people thought that we would actually get to this stage, that we could have achieved what we had achieved. That would be the second big call-out. We now need to get that actioned, and we need to get that implemented. The third one is just the acknowledgement to the marketplace, because a lot of questions have been around my succession. Everybody is, "So why are you there? At your age, you should be gone already."
We know that this is all in place and all in control.
More importantly, that across the company, we have a growing capability, an operational capability in our business. I want to thank you all for your attention today. I want to thank you for all of the energy and the input, and seriously, Tina, I want to thank you for your first presentation of the numbers. Very, very well done. I think you can see when the numbers are there and they are laid out in that fashion, is that you can see that there are many, many, many, many arrows that have been fired off in this company in the last two years, and they are starting to find their targets. Long may that continue. Thank you very much indeed. Q&A
Great. Thanks, Sean and Tina. We have a decent list of questions online, and let us kick off with some of these online questions before we tackle some of the questions from in the room. The first question is from Michael de Nobrega from Avior Capital Markets on the Section 189 agreement, but it is also asked by many other people, including Excelsior Capital, Standard Bank Securities, and Citi. It is really these questions in aggregate are asking three things. On the Section 189 agreement, number one, what level of savings do you expect? Number two, over what timeframe will they come through? Number three, are you able to provide any additional details on the agreement reached?
Yes, no. No. In terms of the timeframe, bearing in mind that we are already sitting here, we are almost in Christmas trade already, so this year is all but done. The bulk of what we have put in place will bring fruits in the next financial year, so FY 2028—
Yeah
—will come to bear. With regards to the absolute detail, for competitive reasons, we are not going to be divulging the absolute detail of what is inside there, because it includes our wage settlement and everything for next year. So it is all wrapped up in one. I am sure you can appreciate that for competitive reasons, it just does not work in our favor to have that out there, at all. Tina, I do not know if there is anything you want to add to that?
No, Sean. I completely agree. Nothing has been factored in for FY 2027, so we have taken no benefit into FY 2027. Everything we have taken will now be in FY 2028.
Thank you. Okay, the second question from Michael. I will give this one to you, Tina. On the gross margin, within Pick n Pay, with the DP World and the rest of Africa benefits now coming through, what level of gross margin do you see as sustainable from here?
To answer that, we continue to work on the gross margin. Fresh, GMD, as I've said, are important part in our uplift of our gross margin. I think it's also important that we do have deflationary categories within the business as well. Our competitors, Boxer, everybody have indicated now that staples and commodities are currently in deflation. At this stage, we won't be giving any guidance on the gross margin. Just to say that there's lots of work happening in the gross margin space, with Dallas and his team.
Thank you. The next question is from Nick Wilson of News24. Pick n Pay closed some franchise stores during the period and also opened or converted a number of stores to company-owned stores. Does this reflect an evolution in Pick n Pay's strategy towards more of a corporate store format? I know you have said the store reset is now done, but I was wondering if we could see more franchise store conversions to corporate stores.
I think certainly franchise remains a very, very important piece of our business and our go to market in Pick n Pay. There's no doubt about it that the franchise business in and of itself is under pressure. We can see that from what is happening in the largest franchise operator in the country. Margins are tougher, margins are tighter, and I think it follows that you will see in the major metropolitan areas where the stores do become available, we have franchisees where because of family, they may have had the store for 15 or 20 years or 25 years. They're at a stage that their family don't want to go into the business. Retail's a hard business. Some of these kids like to take the easier option in life. They don't want to go and grind it out every day.
Where those opportunities present themselves, we will continue to buy those stores—
Yeah
—at terms and conditions that make sense to us, for sure. It does not mean that franchise is finished. I come back to Hopetown, Dallas. Whenever we go to Hopetown and we look at what [Stolie] and his family do in that area, they are the town. They are mowing the verges, they are looking after the town. They are in the community, they are in the schools, they are in everything. You can never really do that as a corporate operator. You can never get that level of engagement. So we will continue to celebrate franchise where it does present incredible strengths for us. Then in a store like Ballito in Natal, where we have Mike Lafferty at the end of a long, beautiful time over there. We bought the store back from Mike Lafferty at the end, and that will become a corporate store.
We will make a margin on both ends, both as a franchisor and a franchisee. Obviously, the maths stack up for us.
Yeah.
The next one is from Verition Fund Management. Could you comment under what circumstances would you consider further sell down of Boxer, and is management considering any other asset sales as a means of achieving the break-even target or unlocking shareholder value? Thank you.
No. We do not contemplate any further sell down of Boxer at all. We believe that the money that we have in place now on our balance sheet should be able to see us through getting back into profit again in the company. If I could just give you a sniff. For every 1% of sales that we lose in terms of our sales growth, costs us about ZAR 140 million of income, ZAR 140, ZAR 150 odd million of income. We most probably lost at least 3% in our top line sales growth number since the war broke out in the Middle East, at least 3%. So you can do roughly the math and look at it. As I said before, momentum in life is everything in business.
For us, if we look at where our business as Pick n Pay is, this is still a very big business at the end of the day. We are like a tanker in the ocean. We know we are a tanker. We are not a cruise ship or a yacht or something else. We know. We are a tanker. Pick n Pay currently is taking a bit of water over the bow, and that is the losses that we make every year. When we were on the trajectory to getting our bow a little bit higher and a little bit higher and taking on less and less water, because at the same time, we have got to deal with fixing up everything that is inside the tanker and everything that makes a part of the tanker.
There is no doubt about it that the exigencies of the outcomes that would happen in the Middle East has led to choppier seas and taking more water over the bow. Despite that, we have managed to continue to show growth ahead of the marketplace, and we will continue driving that and making sure that our stores continue to grow. The short answer is no. This has not just been romantic or just been living in hope, because hope is never a strategy at the end of the day. We firmly believe that all things being equal, we will get there, and it will not be necessary for any further sell-down or asset disposal. Boss, is that?
That is perfect.
There you have it.
If you were thinking of selling it, you hadn't told me yet.
Okay, the next one is from Standard Bank Securities, and I'll address this one to Tina. Tina, it looks like the operating free cash flow of the core Pick n Pay business was + ZAR 0.4 billion for the first half. If we take into account the seasonal nature of the working capital, possible credit cutoff, and the H2 weighted CapEx program, how should we think about operating free cash flow for the Pick n Pay business for full year FY 2027?
Thanks for the question. Because we're a loss-making business and our break-even guidance hasn't changed from FY 2029, we will continue to burn cash in H2. Most of our CapEx is also weighted to H2, so there will be cash spend. But I think what's important is in the cash spend is that we do turn over every rand, and so we're making sure that the capital that we do spend, that we're getting the appropriate return on investment for the capital that we spend. So at this stage, I would say the guidance is by and large in line with what we've previously given the market. But yeah, I don't expect it to be operational cash inflow in H2.
Thank you. Right. From Citigroup, on gross profit margin, how much of the expansion came from the Botswana corporatizations?
Approximately 0.1% of the margin uplift came from Botswana.
Thank you. We have a question from Warwick Bam of Morgan Stanley. Can you expand on your cost levers for H2 FY 2027? Is it possible for you to reduce costs on a like-for-like basis in the second half of the year?
From a cost point of view, as I said previously, every cost line item and every rand gets turned over. We just continue to monitor expenses on a line-by-line basis right now. At this stage, it is very difficult to give guidance on where we will end for H2.
Thank you. Okay, I am going to move on to a question from Paul Steegers at Nedbank. Have you managed to achieve the cost savings in your store labor model that you intended when you started the program?
It's still somewhat premature because we've just come to conclusion on that negotiation now, and those will come to bear in the next financial year, largely. Having said that, the operational team, I mean, Dallas, there's been a lot of energy that has already been targeted at trying to get the stores as efficient as possible. One of the major issues that we have now, because when we started the s189 process, we had two real big goals in that thing. The first one is, in a nutshell, we needed to get flexibility into the company again, that we could get our people working by and large when we needed them to work and not have sort of full set Monday, Tuesday, Wednesday, Thursday, and then have to resort to other forms of labor on weekend and temporary labor on weekend.
The first big one was flexibility, which we got. The second big one was obviously not having to have any retrenchments. That was another goal that we had. We achieved on both of those fronts. On that score, to answer that question, most of that saving will come in the next year.
Thank you. We have another question from Jaco Scholtz. Congratulations on the improvements you've made. Is it necessary for you to hold onto your Boxer shares, and is there any consideration to unbundle the Boxer shares?
No.
We will move on to that one. Are there any questions on that?
Sorry.
Are there any questions in the room before I carry on with the online questions?
Yes.
Hi. Thanks, Sean, for the opportunity. Nico McDonald from Denker Capital. I'd just like to know if you can give some guidance on any potential store closures or space addition, because you obviously can take a view on inflation, we can take a view on like-for-like sales, but there's been a lot of change the last couple of years in terms of your store estate. If you may just give some guidance.
Yeah, sure. I think, if one has a look at one store estate, and I don't think it's any different for most retailers that are out there today that run big store estates. There are a lot of stores that are still too big and not fit for purpose. I'll give you a classic just down the road from me at Kenilworth Centre. We were in Kenilworth Centre, what have we done? Is it about 6,000 GLA?
Yep.
In total. For us in Kenilworth Centre, we could literally halve that store. We could take 25, 28 and I can tell you now, we would run a better business, far less wastage, and we most probably do even more turnover, ironically. That is where we are in discussion with those landlords already to say to them, "How do we cut the store open?" JB is sitting here, heads up our property division. JB and his team have in fact made some wonderful inroads. Tina put them to the sword the other day and made them do a little bit of analysis and stuff from what they have done in the last year. JB, even you got a pleasant surprise.
You were like, "Wow, we have actually achieved a lot." In having a look at our stores as we go through now and we get into lease renewal, that is where we are really focused, in terms of repurposing our stores. I think that you are going to see resizing, reconfiguration. I will give you a classic, Brackenfell Hypermarket. That store in its current construct, just size wise, can never, ever do enough sales again to warrant having a building that big. I think our GLA is about 14,000. We have 14,000, 15,000, JB? 14,000 GLA.
Exactly.
It is nuts. Those stores, we have to get to a stage where the landlord there, we completely reconfigure the center like we are doing in Faerie Glen Hypermarket now. We have done a deal in Faerie Glen. We sold the business off. It is going to be redeveloped, and we will end up with what we call the New Age Hyper now, about 6,500 sq m . The balance of the other 8,000 sq m, 9,000 sq m will be redeveloped in the center. That beneficiation will be an ongoing place. Getting Pick n Pay back into a sweeter and sweeter place. There is no retailer in the world that is not currently confronting this situation. As more business gets done out of store, it is a real issue for everybody, and for the landlords.
The landlords are coming around to it now, and they are sitting down and saying, "We need to talk. We need to look at this." It is a very good question. Anything else from in the room? Stephen, I am sure you have got a few more for us.
Try a few more from online, from a couple of questions around the future of retail and specifically our franchise model. One from Excelsior Capital, but also similar question asked from Protea Capital Management. With increased competition from the likes of Amazon, et cetera, as you have mentioned, what do you think the future of retail is, and more specifically, the franchise model?
When I say how long is a piece of string, retail is evolving. It doesn't matter what branch of merchandise you're in today, retail continues to evolve. We know that going forward from here, that consumers of the future, and specifically the younger new-age consumers, are very easy at just being on the screen and wanting their stuff delivered immediately to the door. So they will continue to evolve a combination of the brick and the click. It's going to happen. But the hallmark of what we set ourselves as our goal is great stores with great people and great inspiration. Because it happens in the world today that if you don't reward people for their time coming to visit your business, they won't come back. So they need to leave the store having feeling enriched by it, having felt, wow, the people were really cool, the experience was fantastic.
I saw some new stuff, I saw some innovation, I saw some evolution. A lot of the energy and effort that's going in, specifically in the area of fresh in our business at the moment, is exactly around that. What are you doing in produce? What are you doing in butcheries? What are you doing in bakeries? It's about training people up again. It's about getting some skills back in the store. Everybody de-skilled. It's amazing how in the supermarket industry you see these cycles of skilling and then de-skilling and skilling and then de-skilling, and then you look at the chains that are really doing well, and those that are sustainable are the ones that actually do the difficult stuff. So it's kind of finding a balance between the brick and the click. But online is a reality.
The new competitors that are in there in the marketplace are an absolute reality. You've got people like Amazon who play a very long game in whichever market it is that they go into. We just have to compete with it. We have to deal with it, and we have to find ways to deal with it.
Okay. Thank you. A couple of questions from Bank of America, as well as Investec. Looking at the H2 CapEx guidance or the full-year CapEx guidance implies a significant step-up in the Pick n Pay segment within the second half. Can you elaborate on how the spend is likely to be allocated? Thank you.
The primary drivers for our spend is revamping strategic stores, and we've got a few currently in the pipeline. We will also look at, as I've said in my presentation, certain franchise acquisitions that make sense for the business, we will continue to look at. Thirdly, it's critical repairs and maintenance as well. Those are the three areas in which we will spend CapEx. If you look back at prior years as well, our CapEx is weighted to H2. We do see us spending, in terms of the CapEx guidance, of ZAR 1.7 billion.
We got some big stores as well, Tina, that are being done early next year. We've got Waterfront store, Canal Walk. We've got some other—
Significant spend.
Yeah.
It is.
We've got some other significant stores that will kick in early next year. Similarly for Boxer, their CapEx is weighted for the second half.
Thank you. Perhaps we will make this the last question, it is from Nedbank Securities. Are you able to give any inflation guidance for the Pick n Pay segment for the second half of the year?
It is interesting. One has been waiting with bated breath to see when the push for inflation would start to manifest and would start to show, and suppliers coming, looking for price increases. We are starting to see some moves in that regard, but I do not think it is going to be anything marked in the rest of this year. I think it will be earlier in the new year. It is obviously very good from a consumer perspective because it keeps prices down for hard-pressed consumers, but I think that you will only start to see an uptick in inflation next year.
Thank you. All right. I think let's leave it at that in terms of the questions.
Thank you very much again for your attention, both here and online. Thank you, Tina. Thank you very much.
Thank you.
To all my Pick n Pay colleagues, thank you.