Shares in Shoprite surged the most in 22 years after Africa’s largest food retailer said sales from its domestic supermarket business rebounded in the second half of its financial year to June, thanks partly to market-share gains.
The recovery meant group turnover for the full year rose 3.2% to R150.6bn compared to the 2.2% increase forecast by analysts, according to Bloomberg data. However, the owner of chains that include Checkers and OK Furniture said earnings declined by up to a fifth in the full year because of trading losses in the rest of Africa and higher costs in SA.
This was expected, with the market focusing more on the improvement in sales through the second half. Shoprite’s shares rose 15% in early trade on Tuesday to R167.51 — their biggest intra-day gain since 1997, according to Bloomberg data. Shoprite’s share price reached a record high of R281.90 in March 2018 before falling significantly, partly on economic growth concerns and problems with its IT systems project. It lost 14% in 2018 to finish the year at R190.15. It has lost about 19% since the beginning of 2019.
Group sales in the second half to June rose 6.5% as the domestic supermarkets unit grew sales by 7.4%, with sales up 9.4% in the final quarter. In the first half, group sales increased by just 0.2%, and declined by 2.7% on a same-store basis. Domestic supermarket sales grew at 2.6%, and fell 0.5% on a like-for-like basis.
Despite better sales in the second half, Shoprite said its headline earnings per share for the full year fell by 14.3% to 20.3% as labour costs rose due to new legislation, and on higher rent and electricity costs.
The group also lost sales following a strike at its largest distribution centre. Meanwhile, it said foreign exchange shortages and local currency weakness in other African markets — including Angola — resulted in a trading loss for the international supermarkets business.
Investors shrugged off the expected decline in earnings because sales growth came in ahead of expectations, “indicating a strong recovery in the fourth quarter”, said Bjorn Samuels, an equity analyst at Argon Asset Management. “The market has been concerned about structural issues relating to Shoprite’s mega IT system implementation, which affected stock availability ... These results indicate that the IT issues may have been resolved.”
However, maintaining the strong sales growth momentum in SA could be tough, given the wave of retrenchments across SA and increased pressure on disposable income, Samuels added.
‘Operational strength’
Lester Davids, a trading desk analyst at Unum Capital, said Shoprite’s shares were also benefiting from positive comments by management about market share gains and the domestic business being “back to full operational strength”.
The group’s shares had been “under considerable pressure” since March 2018 partly because of the weak SA economy. “The surprise turnaround may be luring buyers who view the update as the start of a reversal in company’s performance,” Davids said.
Shoprite CEO Pieter Engelbrecht said market-share gains in the fourth quarter were “testament to our core SA business being back to full operational strength”.
“Better customer service levels and recent market-share gains are indicative that the challenges following last year’s industrial action and the successful deployment of our new enterprise-wide system are now behind us,” Engelbrecht said in a statement.
The group’s expansion plans remain on track, with 80 new supermarkets opened in the period and 88 planned for the next year. Trading conditions in the rest of Africa “remain relentless” but the group remains optimistic about those operations.
For the full year to June, the group’s SA supermarkets unit grew sales by 4.9%, or 1.9% on a like-for-like basis.
“The Checkers chain led the supermarkets’ growth, making strides in improving our fresh offer and gaining market share in fresh produce and convenience meals,” Shoprite said.
Internal inflation for the year averaged just 1.2% for the group’s domestic supermarkets. Almost 10,000 were still becoming cheaper in June, the company said.
Shoprite’s shares were up 4.94% to R152.79 at 2.45pm.
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