Are Shoprite's glory days over?
By Giulietta Talevi - Aug 24th 2018, 14:42
Supermarket giant Shoprite has announced its first earnings decline in 18 years — but it remains upbeat about its prospects.
The first rule of being listed is: don’t disappoint the market.
Shoprite bulls must be ruing their holdings in the supermarket giant after the release of its year-end results. These undershot even the lowest profit expectations and its shares dropped below R200 earlier this week, their weakest since November 2017. It’s down 19% over the past six months.
Presenting Shoprite’s first earnings decline in 18 years, CEO Pieter Engelbrecht said: "In my memory, it’s the toughest [year] that I can recall, but we’re not going to stand here today and ramble on with a lot of excuses."
On a cursory view, the retailer looks almost ex-growth: turnover for the year to the end of June was up only 3.1% to R145.3bn; trading profit fell 1.4% to R8bn; earnings dropped 3.8%; and the grocer cut its dividend by almost 14%, to 279c a share, for the second half.
But Engelbrecht is adamant that "if you’re growing customers and volume and market share you certainly can’t be ex-growth. We’ve still got a lot up our sleeve."
Sasfin Wealth retail analyst Alec Abraham believes the market simply got ahead of itself.
"I don’t believe it’s anything Shoprite did wrong … at the end of the day all companies are going to be held hostage by SA’s economic growth rate and it wears companies down," he says.
A big factor in the results was the virtual disappearance of inflation within the business: whereas a year ago the price of goods sold by Shoprite was rising by 7.3%, now that has dropped to 0.5%.
That’s the lowest price growth Shoprite has experienced in seven years, and as many as 13,241 products were priced at lower rates than a year ago.
Price growth in Shoprite’s supermarkets outside SA has also nosedived; internal inflation in its African stores fell from 14.4% in the previous year to just 1.1% for the year.
Still, Engelbrecht says Shoprite management "is by no means disillusioned".
"It’s very easy in the current economic and political climate to become despondent, but I can tell you we’re not — definitely not."
In fact, Shoprite says its SA supermarkets have produced their highest real growth in the past three years, lifting sales 5.7%, partly because it opened new stores.
However, he admits that the inflation slump between March and June this year took him by surprise. So too did events in Angola: the devaluation of the Angolan kwanza cost the group R251m in an exchange-rate loss, and hyperinflation forced a change to Shoprite’s accounting standard in the country, contributing to a 7% drop in turnover from its African businesses.
SA’s grindingly tough economy is being felt in many ways other than lower sales.
Shoprite revealed that burglaries at its SA stores have soared an eye-popping 34.9%, with 489 armed robberies forcing an almost 15% increase in spend on measures to keep staff and customers safe.
Aside from the cost of the burglaries, "for about three weeks afterwards, there are no customers in those stores — so the effect on turnover is significant", says Engelbrecht.
With Shoprite-branded stores also positioned largely in lower-income areas, service delivery protests have become a problem, costing the company 150 trading days in the year under review.
It’s one of the reasons the group is so eager to grow in the higher-income areas traditionally targeted by Woolworths and Pick n Pay. (In case you’re not sure what "upmarket" is in Shoprite terms, it includes anyone who buys Lurpak butter, according to management.)
Sales at Checkers rose 8.2%, and Engelbrecht says the Checkers brand outgrew the retail market by 66% — equivalent to an extra 670,000 customers every month.
Shoprite has converted 13 of its Checkers stores to its new-look "FreshX" concept, which focuses on fresh and convenience foods. It aims to revamp at least a third of all Checkers stores to the format in the next few years.
Shoprite is also tapping into the MasterChef zeitgeist with a range of "ready-to-chef" dinner kits that it is about to launch. "We’re not close to where we think we should be, but we’ve been able to outgrow the rest of the retailers by two times," says Engelbrecht.
Still, its biggest brand remains Shoprite, where SA’s economic woes are most keenly felt. The chain decided to absorb the VAT increase and, while it noted no improvement in sales volumes as a result, Engelbrecht says management would do it again.
The decision has affected trading margins which, while they remain double those of Pick n Pay, have slipped to 5.5% from 5.8% previously.
Shoprite blames much of its margin pressure on the upgrade of its IT infrastructure to a new SAP enterprise resource planning system but says that should pay off in the next financial year.
Sentio Capital portfolio manager Imtiaz Suliman agrees.
"[Shoprite has] the scale and the financial muscle to invest through this. It’ll spend about R5bn versus Pick n Pay’s R1.8bn [on capex this year] so it can invest ahead of the curve and stay ahead of the competition, which will make it stronger."
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