Shoprite reports its first earnings drop in 20 years
“We’ve been to war,” was how Pieter Engelbrecht, the CEO of Africa’s largest food retailer, described trading conditions behind the first drop in earnings since 1998, the year after Shoprite acquired OK Bazaars for R1 from SA Breweries.
Armed robberies, record fuel prices, chronic unemployment, industrial action and the first VAT hike in 25 years all helped aggravate the hefty adverse effect of low inflation and the collapse of the Angolan currency on the group’s profits in the 12 months to end-June.
The knock from Angola followed two years of 60% growth in earnings from that country, which had become the group’s star performer outside SA.
The Shoprite share price slumped as much as 8.11% to R194.63 in intraday trading on Tuesday, its lowest level since July 12 2017, as shocked investors responded to the unexpected drop in earnings.
Low food inflation in SA, which restricted the group’s ability to pass on nonfood cost increases, and a 50% drop in the Angolan currency were the major factors behind the 3.8% drop in diluted headline earnings per share to 968.7c.
The earnings figure was well short of the 1,090c a share targeted by analysts polled by Thomson Reuters and points to a dramatic decline in performance during the second half of the year.
Analysts’ comparatively bullish full-year forecasts were based on reasonably strong first-half results to end-December, when the group reported a 14.2% increase in headline earnings and a 5.2% advance in operating profit. As it turned out, the second half was a miserable time for the group.
Engelbrecht, who was appointed to replace Whitey Basson at the beginning of 2017, described financial 2018 as “the toughest year I can recall”.
Renier de Bruyn, investment analyst at Sanlam Private Wealth, said that in hindsight pushing the share price to a high of R282 in March 2018 had perhaps been too optimistic by the market.
He said it had been probably influenced by optimism around newly appointed President Cyril Ramaphosa and did not take sufficient consideration of how stressed consumers are or the likely effect of what was already evident in Angola.
ECONOMIC REALITY
“There was definitely a disconnect, the share price ran ahead of economic reality,” De Bruyn said. He said there was a material slowdown in the second half of the year.
The biggest hit was suffered by the “rest of Africa”, which reported a whopping 85% drop in trading profit in the second half of 2018. But SA did not escape; its trading profit was down 7% in the second half after increasing 11.7% in the first half.
De Bruyn said he believes the share price is now trading at more reasonable levels and the group is well placed for any recovery in the economic conditions of its operating markets.