S PA R Don’t rush to buy

Spar CEO Wayne Hook paints a grim picture of trading conditions in the food retail sector. “We are cutting each other’s throats,” says Hook. With headwinds facing consumers growing stronger and competition intensifying, conditions seem set to get tougher.

Given trading conditions, Spar did well in its year to September, lifting its core wholesale division’s sales 11% to R35,5bn. The 868 Spar stores it serves lifted retail sales 11,5% to R53,7bn.

At the retail level Spar fell short of Shoprite, which reported SA supermarket sales up 12,9% in its year to June. On a like-for-like store sales basis Spar’s 10,6% bettered Shoprite’s 339-SA store Shoprite chain’s 8,5% increase and its 215-store Usave chain’s 9,7% increase.

Diversification also served Spar well in the financial year. At the wholesale level sales through its 838-store Tops liquor chain rose 18,5% to R7,5bn, while sales through the 281-store Build it building supplies chain rose 17% to R7,5bn.

Overall, Spar’s sales grew 11% and its headline EPS by 10,6%, falling short of a consensus forecast by analysts polled by I-Net of a 14% rise.

Corporate-owned Spar stores appear to have retarded profit growth. Spar entered retailing in 2011 when it bought 10 Spar stores in financial difficulties. There are now 11 corporate stores.

Retailing is not part of Spar’s model but the stores were bought to defend the franchise. “It has been a harder slog than we expected,” concedes Hook.

More corporate stores could follow, says Evan Walker, a fund manager at 36One Asset Management. He points to competitors such as Massmart and Pick n Pay, which are looking to aggressively grow store numbers.

“Everyone is sniffing around each other’s franchises,” says Hook. Spar, he adds, has a preemptive right to buy Spar stores. “We won’t let any sites go that we want to hold on to,” he stresses.

On the food retail sector as a whole, Walker warns of excessive expansion where 500 new stores will open over the next two years. “If GDP growth were strong I would be happy with food retail investments,” says Walker. But with GDP growth fading fast, he predicts: “There is going to be a bun fight in food retailing such as we have never seen before.”

Woolworths CEO Ian Moir shares his view. Referring specifically to the middleincome market segments (LSMs 5-7) he predicts competition will become “very fierce”. About 35%-40% of Spar’s customers are in the LSM 3-6 segments, with the balance in the LSM 7-10 segments, says Hook.

FNB household and property sector strategist John Loos also sees tougher times ahead. He says from late-2009 real household disposable income rose significantly and unsustainably faster than GDP growth. This post-recession “relief recovery” which drove strong retail sales growth is over, he says. From now on, he predicts, real disposable income growth will be far more in line with SA’s “anaemic” GDP growth. Loos says the food retail sector is already seeing what he terms a “normalisation” of sales growth in line with slowing disposable income growth.

Indicating this, Loos says retail food sales growth in the three months to September slowed to a year-on-year 1,4% in real terms from a peak of 4,3% in March. Overall, he predicts retail sales growth to slow from about 4,7% in 2012 to 2%-3% in 2013.

His prediction calls for caution in the retail sector as a whole at a time when most retailers’ ratings are at or near record highs. In Spar’s case its 21,7 p:e is well above its longterm mean of 18 p:e and in line with its peak rating at the height of the 2007 retail boom.

Spar is a solid company, but for patient investors better buying opportunities appear to lie ahead. HOW THEY LINE UP ON GROWTH