Spar’s venture into Poland is likely to come under more pressure on the back of increased competition and rising costs, with analysts divided on the turnaround prospects of the food and building material retailer's operations there.
And in what could potentially worsen the challenges, this week a missile hit a Polish village, killing two people and bringing the impact of Ukraine war closer to the country.
In its year to September, loss-making Spar Poland terminated contracts with some Spar retailers and restructured distribution centres, closing its Warsaw facility, a move that hit performance.
According to Spar, 58 retailers with low levels of purchasing loyalty elected to leave Spar Poland. “The loss of these retailers has negatively impacted turnover growth in the second half of the financial year,” it said. Operating losses for this region dropped 9.5% in local currency. Spar has 180 stores in Poland.
Ricardo Micheals, equity analyst at Denker Capital, said Spar expects Poland to break even sometime in 2024 and “this might or might not happen given the tough competitive environment in Poland and Spar’s small market share in this market.”
Micheals said Spar CEO Brett Botten is focused on addressing the issues facing the company, “but that might take a lot longer than he thinks and we will have to wait to see if this business contributes significantly to the group. In my view they should cut their losses and focus their energy on the core South African business.”
Casparus Treurnicht, portfolio manager and research analyst at Gryphon Asset Management, said Poland is a classic example of why the grass is not necessarily greener offshore.
The offshore businesses of Spar is where there’s considerable concern. Though inflation was not given for these markets, the turnover growth numbers were very worrying
— Casparus Treurnicht, portfolio manager and research analyst, Gryphon Asset Management
But Alec Abraham, senior equity analyst at Sasfin Wealth, believes the turnaround of the Polish business represents a good growth opportunity.
He said the Polish business was bought in a storm — during Covid and out of a lengthy liquidation process — so there were lots of problems that had to be dealt with. “However, I believe the management is making good progress in fixing the business and optimising it. This process is, however, taking longer than expected or hoped by investors.”
Spar, which also has a presence in Sri Lanka, Ireland and Switzerland, reported disappointing financial results, according to analysts, resulting in a sharp drop in its share price this week. The stock declined 13% on Wednesday, and fell a further 3.79% on Thursday. It was marginally down on Friday to close at R137.33.
The performance was hit by, among other things, advertising and marketing spend, and increased fuel costs.
“Spar is underperforming the rest of the food retail sector and, once you exclude its relatively big liquor business, you will understand why,” said Treurnicht.
Spar’s alcohol outlet Tops was a star performer, with a 42% rise in turnover to R10.2bn. The rest of the Southern African business grew in single digits. Over the past three years Tops is up just less than 59%, said CFO Mark Godfrey. Spar’s core grocery business reported turnover growth of 5.3% to R65.9bn.
Abraham said Spar SA sales, while improving in the second half of its financial year, again appear to be weak against peers.
Treurnicht said “inflation is causing the consumer to trade down to Shoprite at the moment”. Woolworths Food was also not untouched in the past few months, with sales underperforming inflationary trends, he added.
“But the offshore businesses of Spar is where there’s considerable concern. Though inflation was not given for these markets, the turnover growth numbers were very worrying,” he said.
Micheals said Spar’s performance showed “how much pressure this business is under. Margins are going backward as they are facing cost pressures in South Africa (fuel costs, load-shedding and so on), while sales growth is not really on par with their competitors. They are facing some difficult times.”
His main concern is the management team “being focused on putting out too many fires they can’t easily fix ... Their competitors are laser-focused on their core businesses [in South Africa], while enhancing customer experience and stealing market share from Spar as a result.”
For Treurnicht, the "nail in the coffin was when Spar declared a dividend of only 400 cps for the year, another step down from the interims, which raises the question of whether they might need to inject capital overseas sometime soon."
Spar declared a final dividend of 225c, taking the dividend for the year to September to R4 a share from R8.16 in the previous period. Abraham said "a lower dividend to pay for certain expenses, while prudent, was also bad news”.
During the year to September, Spar opened 72 new grocery and liquor stores. Tops has 879 outlets. This year the company launched online and delivery platform SPAR2U, with 87 stores. It expects to increase this to 190 by the end of December across Spar and Tops stores.
This week Woolworths and Shoprite released strong trading updates.
The performance of Spar and other retailers are not comparable due to different reporting periods, but Abraham said at the upper-income segment Woolworths, and to a greater extent Checkers, appear to be gaining market share from Spar and Pick n Pay.
Micheals said Woolworths continues to perform under a new management team. It is expecting headline earnings per share to be up at least 20% for the 26 weeks ending 25 December, an impressive number given the environment.
Shoprite delivered another solid set of results from sales (+18.6%), but this was off a Covid-impacted comparison. “Would be interesting to see how their performance does from here on out,” he said.
Spar’s executives declined to comment.
Commenting on the business’s outlook for next year, Treurnicht said: “We don’t see the economic climate changing soon. The upcoming holiday period might be much better for all retailers, but after that we are seeing depressed disposable income continuing to impact the retail sector.”
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