SOUTH AFRICA – Feeble earnings growth hit by expansion costs at South African retail bellwether Shoprite on Tuesday saw the group’s shares sliding as much as 8.8% to an intraday low of R140.57, before closing 5.6% lower at R145.50.
Investment in new stores almost doubled to R1.6bn as the company opened as many as 125 stores in an aggressive bid to gain market share in an environment where consumers are tightening their belts amid ever-increasing living costs, rising debt and a dearth of jobs.
Basic earnings per share rose 3.3% to R6.98 in the 12 months to June, below the R7.35 mean estimate of 15 analysts in a Bloomberg survey.
Over the past five years, Africa’s largest supermarket player, which targets the middle-to low-income bracket, has grown store space by nearly 40%.
The juggernaut shows no sign of stopping, with 136 new supermarkets pencilled in by June next year as investment priorities shift towards the rest of Africa.
“We could get lots of criticism on this one (expansion) … should we have done it or should we not have done it?” Shoprite CEO Whitey Basson said.
“As (part of) a management team who is able to analyse opportunities, I’m very happy that we have invested that (R1.6bn) into new stores and we did it in an economic slowdown.”
Spending on new branches and information technology, as well as higher rentals at new stores and increasing electricity costs, outpaced turnover.
Ryan Wibberley, Investec Asset Management’s head of dealing for emerging markets, said that while there was an initial knee-jerk reaction that sometimes could be excessive, it remained to be seen whether there would be further pain to come.
“Quite frankly, the results disappointed in a meaningful way,” he said. “The stock was trading at forward earnings of 22 times before the result … certainly not cheap for this kind of earnings growth … you probably find that kind of multiple is unwarranted, which is why the share is pulling back so dramatically.
“The consumer is in a difficult position and one of the places you’re likely to see it is in the results of the retailers … also, they’ve been affected by the African Bank failure, where people could borrow money there and now they can’t.”
Shoprite’s trading margin fell from 5.8% to 5.6%.
“What was experienced on the sales floor was a reflection of the country’s broader economy … there is not much relief in sight for the beleaguered consumer,” a downbeat Mr Basson said.
The company’s local supermarket operations increased sales by 8.7% to R76.88bn. Internal food inflation averaged 4.7% from 4.3% in 2013. The company was not unscathed by the crippling five-month platinum strike that took place earlier this year, with about R1bn in lost sales recorded.
According to Jean Pierre Verster, an analyst at 36One Asset Management, the group had to make sure the high level of costs, which had a lot to do with investing in the business and expanding, translated into revenue to offset those costs.
“There is a real concern that their store expansion in SA has been too high, leading to cannibalisation, and the market is saturated … they need to slow that down and focus more on the rest of Africa,” he said.
Sales at the African operations rose 16.2% in constant currencies. Shoprite operates 169 stores in countries including Zambia and Ghana. The search for higher yield has consumer-facing players turning their attention to Africa’s resource-rich economies.
“Shoprite in Angola sold 35,000 pairs of Havaianas (flip-flop sandals) last year … stacked up it would be three times higher than the Carlton Centre,” the company said.
Along with 30 new stores, Shoprite will enhance distribution centres in Nigeria, Angola and Namibia as it invests R1.5bn outside SA.