Food & drug retailers, including the likes of Spar, are supposed to be among the most defensive and resilient shares on any stock exchange. The reason is simple: they sell non-discretionary items that people cannot do without. But recent results and updates from this sector have shown that almost all of them are buckling under the strain of a poor ambient economy, high interest rates and the impact of sustained load-shedding.
Spar recently posted extremely weak interim results, the main casualty being the dividend, which was passed completely. The misery was compounded by its Polish operation, which continues to disappoint, and profitability locally is well down.
Some debt covenants have been breached but have been waived without conditions. Switzerland is also suffering from shoppers taking advantage of cheaper products in neighbouring countries. And, like their major supermarket competitors Pick n Pay and Shoprite, Spar operators are having to spend huge amounts of money on diesel to keep their backup generators working. Build it Group, the home improvement chain, is also taking strain as that industry continues to languish.
For the six months to 31 March 2023, group turnover increased by 7.9% to R72.9bn, while operating profit fell by 17.5% to R1.5bn. Diluted headline earnings per share (HEPS) fell by 30.2% to 447.7c and the dividend, which in March 2022 was 175c a share, was passed completely to conserve cash.
Within Southern Africa, turnover in the core grocery business rose by 7.9% to R39bn, while grocery and liquor (TOPS) combined grew by 6.5%. Financial 2022 was especially strong for liquor and so it was coming off a high base of comparison in financial 2023. Turnover at Build it declined by 3.8% to R4.8bn. S Buys, Spar’s pharmaceutical business, grew turnover by 20%. Collectively, grocery, liquor, DIY and pharma turnover in Southern Africa rose 5.6% to R47.1bn. Operating profit sank by 28%, from R1.42bn to R1.02bn, while the operating profit margin collapsed from 3.2% to 2.2%.
Spar’s Ireland & southern England operation is the second-largest contributor to turnover and profit after Southern Africa. Revenue from this source rose by 15.1% to R17.1bn and operating profit was up 12% to R437m, but the weak rand flattered the result; in euro terms, turnover was up 8.8% and operating profit rose 5.8%.
Switzerland’s turnover rose 6.9% to R7.4bn, while operating profit slumped 41.5% to R110m. In Swiss franc terms, turnover was down 4.3%, while operating profit fell 47.6%. Swiss shoppers continue to find better value in neighbouring France, Germany and Austria, and spend a lot of their money in these countries.
Poland’s turnover rose 9.3% to R1.4bn and operating profit rose 65.3%, though it still made a loss of R58m. In local currency, turnover rose 4.9% and operating profit 66.7%.
Debt:equity is now 119% and the group has breached a number of debt covenants with respect to leverage ratios.
Spar is caught in a nasty situation; it urgently needs to restore its operating profit margin in its largest market — Southern Africa — by at least 50 basis points in the short term and then make incremental improvements. It also needs to make a decision on Poland. Frankly, the most likely option appears to be a sale, provided they can find a buyer. It’s unlikely ever to be a major profit contributor and is just a distraction right now. And then it needs to improve the balance sheet, probably with a rights issue, though they deny this.
Spar has too many moving parts. It lacks the elegant simplicity of a Shoprite, Pick n Pay or Clicks, and the next few years are probably going to be taken up by fighting fires on a number of fronts. Does it retain underperforming Switzerland, for example? Until these and other issues are resolved, the share is best avoided.
• Gilmour is an investment analyst.
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