Shoprite's profit flag creates 'perfect storm'

DURBAN – Shoprite's shares yesterday tumbled to their worst in nearly 20 years on the JSE, dragging food retail stocks and the All Share Index down after Africa’s biggest grocer flagged that its profits during the six months to end December could fall by as much as 26 percent.

The news, which came after the JSE stopped trading late on Tuesday,  sent the market into a tailspin yesterday.

Ron Klipin, a senior analyst at Cratos Capital, said the weak trading update took the market by surprise and the statement became a perfect storm encompassing factors such as food deflation affecting 10 719 items in basic foods. 

Shoprite fell 15 percent, the worst since July 1999 as the group blamed low food inflation and a drop in currency earnings for the subdued outlook. It also said lower gross margins, stock shortages and weak trading conditions hammered its performance, driving its stock to R151.53 a share in morning trade. It closed 14.21 percent lower at R153.13.

The rout extended to Pick n Pay, which fell 3.07 percent to R68.50, Woolworths, which slid 3.35 percent to R49.27 and the Spar Group, which eased 2.82 percent to R195.11. The all share ended down 0.47percent, while the retailers general index shed 2.63 percent. 

Jordan Weir, a trader at Citadel, said the negative sentiment was directly related to Tuesday’s notice to shareholders that the company faced headwinds during the period. 

“According to the SENS announcement, the main reasons for the sharp decline in the company’s profits included the use of new financial reporting standards, which may have had a negative impact on the final presentation of its underlying numbers,” Weir said. The firm also fell on cost and depreciation increases, as well as weak turnover numbers and lost sales resulting from the implementation of a new IT system, which had negatively impacted the flow of supply, he said. 

“All in all, the decline in the group’s profits demonstrates again that the South African consumer has remained under extreme financial pressure in a challenging economy, and that the consumer is thinking twice before spending unnecessary money is becoming the norm,” Weir said.

Klipin said food deflation had hurt trading margins as the group had a large share in the lower LSM markets, while currency fluctuations in the continent and hyper-inflation in Angola weighed on the results.  “These factors were beyond the control of the group, which is a large player in the African food market, and is not necessarily a recurring item. 

“The other side of the coin was factors such as strikes, IT challenges and the new logistics operation in Gauteng,” Klipin said. However, he said the year ahead should result in many of the problems facing Shoprite, with its strong brand, being overcome. “The likelihood of food inflation later this year should also help turn their fortunes around,” Klipin said.

BUSINESS REPORT