Cadence v Pick ‘n Pay debate: Retailer ignored matching principle to artifically boost profit number

on . Posted in Basics of Investing

Pick n Pay’s share price has surged 18% in the past two weeks, most of it coming after the retailer published its interim results yesterday morning. Highlight of the numbers was a 35% jump in pro-forma (like-for-like) earnings. Trouble is those earnings were based on two extra days’ gross profit with none of the associated costs taken into account. Pick n Pay’s financial director Bakar Jakoet defended the figures after an initial challenge from investment professionals Cadence Capital. But Cadence believes he has not addressed the key issue. As things stand right now, I have to agree with them. – AH

Pick n Pay's share price has jumped from 4025c to over 4800c in two weeks. Is it justified?

Pick n Pay’s share price has jumped from 4025c to over 4800c in two weeks. Is it justified? Graph by PrimeCharts

From Cadence Capital: 

We would like to respond to Mr Jakoets’ comments:

In 2012 – Pick n Pay happily reported based on 184 days gross profits and 184 days trading expenses.

In 2013 – Pick n Pay now report on 182 days gross profits and 182 days trading expenses.

They now wish to compare 2013 to 2012 on a 182 day like for like basis. In order to make this comparison they now exclude 2 days of gross profits but exclude zero days of matching trading expenses. This runs foul of the fundamental accounting concept of Matching. The Matching concept states that you must match income with their attributable expenses in order to determine profit.

In essence Mr Jakoet wishes us to believe that for 2 days of the year Pick n Pay made sales in locations which had no staff, no electricity and paid no rental. He views these trading expenses as not “directly attributable expenses”.

It does not take a forensic accountant to calculate that this is a company that only makes a bottom line profit of R192 million for 182 days i.e. barely R1 million a day. This is from 1,000 stores i.e. R1000/day/store. To now make an adjustment to their bottom line of R40 million due to a mere 2 day accounting reporting period change has no standing in economic reality. This pro- forma adjustment is nearly a quarter of their entire period’s profits.

The current trading period in 2013 ended on 01 September. I wonder if Mr Jakoet included only gross profits for this one day and matched zero trading expenses?