PICK OF THE MONTH

One of Shoprite’s key successes was the rollout of its Sixty60 delivery service app, which was accelerated due to Covid-19

After a few difficult years, Covid-19 seemed to be the jolt that supermarket giant Shoprite needed.

It showed the true proactive qualities of the management team. A Covid-19 strategy was executed quickly and effectively, already starting in January by diverting product sourcing away from international suppliers, and more specifically away from China.

Since the reopening of SA’s ports and production in China coming back on stream, imports of stock from China have resumed.

Managing a crisis like the pandemic for a group such as Shoprite is not easy, considering that it operates in 14 countries, all with different regulation, and various approaches to and severity of lockdown restrictions.

One of Shoprite’s key successes was the rollout of its Sixty60 delivery service app, which was accelerated due to Covid-19 as it was still in beta phase when the pandemic hit. This service has been very well received — it’s already being rated the No 2 shopping app in SA — and has attracted traditionally non-Shoprite shoppers to the brand.

This is hugely encouraging, since online shopping is fast proving to be a game-changer in grocery retail in SA.

Other initiatives included delivering medicine through its online liquor service, rolling out virtual vouchers and becoming the first grocery retailer to offer contactless mobile payments. These have contributed to the group gaining market share from its peers.

The business would have been negatively impacted by the ban on liquor sales, which resulted in 79 lost trading days. Liquor sales traditionally add about R6bn-7bn to sales, which means the recent scrapping of this ban will be beneficial to the group.

Shoprite’s recent set of results for the year ended June 2020 was more than satisfactory, with its SA supermarkets doing especially well with solid like-for-like sales of 6.8%.

Though customers shopped less often, with the number of transactions down 31%, basket size increased significantly.

Shoprite’s non-SA supermarket business saw sales decline by 1.4%, mainly as a result of currency devaluations. Its African business is a mixed bag, with Zambia doing well but Angola hit hard by the devaluation of its currency relative to the dollar. Shoprite is now looking at exiting Kenya and, curiously, either exiting or reducing its Nigerian stake. Having operated in the secondlargest economy in Africa for almost 15 years, the move to exit is surprising, as Nigeria appears profitable in local currency terms compared to some of its other African investments.

That said, this strategy will unlock cash flow which can be applied to its domestic business and will support its dividend policy.

Furniture and other operations were harder hit by Covid19, with furniture sales down 11.9%. To understand the magnitude of the impact of the pandemic on this sector in the second half, sales from this segment were down 23.1%, with 52 trading days lost in SA.

Group revenue increased by 6.4% to R156.9bn and trading profit was up around 10% to R8.3bn. On a positive note, the group increased its earnings before interest and tax margin by 20 basis points to an enviable 5.3%.

With an increasing number of companies not declaring dividends due to the uncertainty of the year ahead, Shoprite increased its final dividend by 40% to 227c a share, bringing the total dividend for the year to 383c a share.

This is a positive reflection of the confidence management has, particularly in the SA market, where the group intends spending 95% of its 2021 financial year capital expenditure budget. This is expected to increase the group’s return on investment capital.

Since the release of its results, Shoprite’s share price has recovered sharply from about R110 at the end of August. The share was just over R100 at the end of July.

It is not the cheapest counter on the JSE, especially with consumer confidence still under serious pressure, but Shoprite’s cheap product offering and innovative approach mean the business continues to take market share from its competitors. It has a total market share of about 31.6%.

Though Shoprite could be classified as a mature business, it is highly cash generative, and has a strong balance with low gearing, a proactive management team and a defensive business model.

For all these reasons, the inclusion of a Shoprite holding is worth considering in a welldiversified portfolio. ●

Source: INFRONT