JOHNNESBURG – Shoprrite Holdings fell sharply on the JSE on Wednesday, tanking with other retail stocks, as weak consumer spending in a stagnant economy sliced its net profit nearly 20 percent.
Shoprite shares declined by 9.25 percent on the JSE to close at R126.85 yesterday. Pick n Pay was down by 5.71 percent, Truworths lost more than 3 percent and Woolworths was down by 3.41percent. Massmart and Libstar Holdings were down by 1.20 percent and 4.62 percent respectively.
Nishlen Govender, a portfolio manager at Citadel, said it was understandable that retail stocks would be punished in an environment in which economic growth was less than population growth.
“The constrained South Africa consumer has become especially elastic with respect to demand, seeking specials and sales in order to be enthused to shop. It is difficult to extract any selling price inflation in this environment, and the effect shows in company earnings.
"Generally, these businesses are defensive in this sort of environment, but continued strain in South Africa has forced even food and grocery retailers to adjust their strategies to maintain volume growth. We expect this to continue to be a difficult environment to operate in, and believe retailers will continue to feel pain.”
In the year to the end of June, Shoprite reported a 19.6 percent decline in diluted headline earnings per share to 779.9 cents a share.
Trading profit declined by 14.3 percent to R6.9 billion, negatively impacted by the strike in the first half of the year, slow economic growth and currency devaluations in its operations in the rest of Africa.
However, the group’s core business, Supermarkets RSA, achieved a 4.9 percent increase in sales to R112.7bn, with internal selling price inflation of 1.2 percent, up from 0.3 percent compared with last year. Supermarkets RSA has 1 580 stores and represent 74.9 percent of group sales.
In the non-RSA supermarkets, ongoing forex shortages, currency devaluations and inflation in Angola hit profits as the business reported a trading loss of R265 million.
Group sales increased by 3.6 percent to R150.4bn.
Shoprite declared a dividend of 319c, down from last year’s 484c.
Chief executive Pieter Engelbrecht said the group’s core operations, Supermarkets RSA, increased its sales by 4.9 percent, with like-for-like sales growth up by 1.9 percent.
“The performance was significantly impacted by our well-documented first-half challenges. With the strike in the distribution centre behind us, our team worked tirelessly to restore performance in the second half,” Engelbrecht said. The group’s first-half sales grew by only 2.6 percent.
Govender said the results reflect a much better trading environment in the second half, offsetting some of the pain in the first half.
“Importantly, many of the issues in the first half were transitory, such as the upgrade to the new ERP system and warehouse disruption due to strike action, bodes well for the outlook for Shoprite. Still, there are concerns with relatively low selling-price inflation and more than 9 000 items still in deflationary conditions. Unfortunately, this is due to the macroeconomic conditions that have plagued all retailers,” Govender said.
He said it was difficult to see significant sales or margin improvement from here, but a large part of the discount in Shoprite, relative to it peers, had to do with one-off events and lacklustre returns from African operations.
“From an African perspective, the hyperinflationary or recessionary environment in Angola continues, weighing on profits and sales, but it is promising that the rest of Africa has done reasonably well.
“Despite factoring in these issues, the result still represents a miss with respect to earnings, and hence the stock being down today. We still believe that Shoprite is a high-quality retailer, which is perfectly positioned in the South African and African context,” Govender said.