Shoprite’s interim results, which showed that the grocery and furniture retailer continues to buck SA’s retail malaise, can arguably be viewed as a fitting sendoff for Whitey Basson, who recently ended his 37-year-long run at the company.
At a time when its peers have blamed poor sales on a difficult trading environment with aggressive promotional activity in the market and downbeat consumers who are facing rising living costs, unemployment and a heap of debt – Shoprite continues to maintain its retail kingpin status.
Under Basson’s final days as CEO (later moving to a vice-chairman role), Shoprite advanced trading profit by 19.2% to R3.9 billion for the six months to December 31 on the back of overall sales growth of 14% to R71.3 billion. Trading margins – a key metric used by the retail sector to measure profitability – grew to 5.4% compared with the same period in 2015.
Like-for-like (excluding new stores opened) grew 8.6% or 1.2% after factoring in internal inflation, which grew by 2.7% to 7.4% due to the severe drought that has hit large parts of the country, with the Western Cape and Eastern Cape slightly spared. The drought spurred a rise in white and yellow maize prices, which has resulted in the price of staple household products such as maize meal, rice and bread rising.
Its results came a day after a plan to merge the African operations of Shoprite and Steinhoff in order to create a retail behemoth in Africa was ditched after shareholders of both parties failed to agree on a price (read more here).
Shoprite chairman Christo Wiese, who owns 16% in Shoprite and 23% in Steinhoff, says both retailers learned a lot about each other during merger talks.
“The talks also helped to teach us two things: the moment a deal is announced every man becomes a corporate finance expert. The second is that there are some people, the moment we announced the cautionary [for the merger in December], didn’t like the deal. It was the knee-jerk reaction that people made without knowing what the terms of the deal were,” says Wiese.
He rates that merger as being a “flutter behind us”.
Shoprite’s earnings were boosted by consumers looking for value across its brands that pander to vast consumer groups including discount grocer Shoprite and Usave stores, and higher income-focused Checkers.
Just like most retailers, Shoprite grew its market share through promotional activity, from 31.2% to 31.7%, having launched a collectable campaign of miniature grocery items at Checkers and Black Friday discounts (the US retail phenomenon fervently embraced by South Africans on November 25) to name a few. These initiatives resulted in Shoprite bringing 6.5 million more customers into its stores.
New CEO Pieter Engelbrecht, who replaced Basson on January 1, says Shoprite ramped up its promotional activity as it knew that the crucial festive season for retailers “would not be great”.
“Over the last six months, customers voted with their wallets and this is something that Shoprite does in the most adverse times. We have managed to grow the customer base by 6.3% equating to 100 sales transactions per second,” says Engelbrecht.
Shoprite’s growth was also helped by its slick supply chain operations with central distribution operations giving it the ability to control costs and grow margins. Its operating expenses grew by 12.6%.
Another profit kicker was its stores in the rest of the African continent. Sales outside of its home market now account for 20% of the group’s total and grew 32% to R14 billion, while its domestic sales grew 10% to R57 billion. The top performers were Angola and Nigeria, which grew sales by 155.4% and 60.1% respectively.
Says Anthony Rocchi, the portfolio manager at Rexsolom Invest: “these results were carried by exceptional Angolan and Nigerian performance.” Equity analyst at Electus Fund Managers Damon Buss supports Rocchi’s view, adding that Shoprite’s African strategy is starting to hit critical mass as the profitability of the established stores outweighs the losses of the new stores.
Engelbrecht says Shoprite will aggressively expand its current store base of 2 653 in South Africa and further into the continent. It will have open 165 new stores by next year June – 116 stores in South Africa and 49 outside of the country.
The retailer raised its interim dividend by 15% to R1.80 from R1.56.
Shoprite shares finished 3.52% higher on Tuesday to R194.62.
Listen as Shoprite CEO Pieter Engelbrecht talks about the retailer’s results with Nastassia Arendse on SAfm here.
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