TRADE OF THE MONTH

Sho­prite still looks a much bet­ter op­tion than Wool­worths

Financial Mail - Investors Monthly - - Contents - Stafford Thomas

It’s been a painful time for those who bet on Wool­worths two years ago as they have seen its share price slide more than 40%.

For in­vestors who opted to back Sho­prite, it has been a dif­fer­ent story. Their con­fi­dence has been re­warded by a 60% rise in the re­tail gi­ant’s share price over the past two years.

While this huge di­ver­gence in share-price per­for­mances is un­likely to be re­peated over the next two years, Sho­prite still ap­pears to be the share to back and Wool­worths, which faces mul­ti­ple chal­lenges in SA and Aus­tralia, the share to avoid.

In the 53 weeks to July 2 Sho­prite romped home with head­line EPS (HEPS) up 16.1% on a 52-week ba­sis.

Wool­worths, in its worst show­ing in a decade, limped in with HEPS in the 52 weeks to June 25 down 7.6%. HEPS fell 5.5% short of the min­i­mum hur­dle set for ex­ec­u­tives to re­ceive in­cen­tive pay­ments.

In SA, Wool­worths scraped home with profit be­fore tax (PBT) up a mar­ginal R24m to R4.4bn. It came thanks to a com­mend­able 8.3% rise in its food di­vi­sion’s PBT to R1.98m, off­set­ting a 6% fall in the cloth­ing di­vi­sion’s PBT to R2.17m.

Wool­worths’ big­gest set­back was in Aus­tralia, where the com­bined PBT of its David Jones (DJ) depart­ment-store busi­ness and fash­ion re­tailer Coun­try Road Group slumped R600m (21%) to R2.24bn.

The big dam­age was done by DJ, ac­quired by Wool­worths in 2014 for R21.4bn.

“DJ is a dis­as­ter,” says Evan Walker of 36One As­set Man­age­ment. It’s hard to ar­gue with him.

DJ’s PBT, after com­ing in flat at the half-year mark, went on to col­lapse 73% in the sec­ond half. This left the year’s to­tal down R595m (29.5%), at R1.28bn.

At a re­sults pre­sen­ta­tion, Wool­worths group CEO Ian Moir put a pos­i­tive spin on DJ’s prospects. In part, he is pin­ning his hopes on a just-com­pleted cus­tomer re­la­tion­ship man­age­ment (CRM) sys­tem.

“It will trans­form the busi­ness,” he said. “DJ has never had a CRM sys­tem un­til now.”

Wool­worths is back­ing its op­ti­mism on DJ with an A$200m (R2.1bn) up­grade of its flag­ship El­iz­a­beth Street store in Syd­ney. It will re­ally have to earn its keep to make a de­cent

David Jones will not have the clear run­way Wool­worths had when it en­tered the high­end food sec­tor three decades ago

re­turn. The up­grade cost equals Wool­worths’ to­tal capex spend on SA op­er­a­tions in the past fi­nan­cial year.

DJ is also rolling out top-end food out­lets in its stores in a pro­gramme set to cost A$100m over three years. “We will have the best food of­fer­ing in Aus­tralia,” says Moir.

Per­haps. But DJ will not have the clear run­way Wool­worths had in SA when it en­tered the high-end food sec­tor three decades ago.

“Aus­tralia is not like SA,” says Walker. “There is an abun­dance of owner-op­er­ated food stores in the top end of the market and they have very loyal cus­tomers.”

Also in doubt is the depart­ment-store model it­self. Depart­ment-store groups in the US and UK are strug­gling. In SA, Stuttafords threw in the towel in May.

The out­come of Wool­worths’ depart­ment-store ven­ture in Aus­tralia is far from cer­tain. It rep­re­sents a risk in­vestors should cer­tainly not take lightly.

In­vestors should also be aware of the chal­lenge that Wool­worths faces in its core LSM 8-10 seg­ment of SA’s food market. It is a seg­ment in which Wool­worths’ R27bn an­nual sales food di­vi­sion has long held sway.

Sho­prite aims to change that. “Wool­worths is not a spe­cific tar­get,” says Sho­prite CEO Pi­eter En­gel­brecht. “We just want more of their cus­tomers.”

Spear­head­ing Sho­prite’s drive into the up­per-end food seg­ment are its new-gen­er­a­tion Check­ers stores. Eight opened in the past year with 14 more com­ing in the cur­rent year. It will take to­tal Check­ers store num­bers to 223.

“With its new-gen­er­a­tion Check­ers stores Sho­prite has got its fresh pro­duce and store con­fig­u­ra­tion spot-on,” says re­tail an­a­lyst Syd Vianello. “They will give Wool­worths a run for its money.”

Sho­prite’s clout in the market is set for an­other boost as part of the newly listed Stein­hoff Africa Re­tail. It brings to­gether the pow­er­ful com­bi­na­tion of Sho­prite and Pep­kor as its key com­po­nents. “We will im­me­di­ately start gen­er­at­ing sup­ply-chain syn­er­gies with Pep,” says En­gel­brecht.

This is par­tic­u­larly so in Africa, where Sho­prite has 386 stores in 14 coun­tries and Pep­kor more than 300. “We will lever­age our ad­van­tage in Africa,” says En­gel­brecht. “Sho­prite has 21 new stores com­ing, 45 con­firmed and an­other 166 po­ten­tial stores.”

But even this pace is not fast enough for Sho­prite. It is eye­ing East­ern Europe — where its con­trol­ling share­holder, Stein­hoff, has a 975-store foot­print through its Pepco brand.

“Poland, Slo­vakia, Czech Repub­lic, Ro­ma­nia and Hun­gary will be con­sid­ered,” says En­gel­brecht.

But the re­tailer will not bet the house. “If we go ahead we will be­gin small,” says En­gel­brecht. “If it doesn’t work out we can write it off and walk away. I won’t pull a David Jones on Sho­prite.”

Of course, DJ could yet prove to be a win­ner for Wool­worths. Time will tell. But for now Sho­prite looks like a far safer op­tion as a com­pany likely to sus­tain growth mo­men­tum at a crack­ing pace.

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