Doing everything just rite
Shoprite has clearly recovered its mojo under CEO Pieter Engelbrecht, while dark horse Lewis is on a canter
● After a few tough early years at the helm,
Shoprite CEO Pieter
Engelbrecht is well on the way to confirming his position as the perfect successor for
Whitey Basson, one of
SA’s all-time great retailers.
In the five years since he took over, Shoprite has faced some daunting challenges — extending the reach of its IT systems, creating megadistribution centres in the midst of labour disputes, realigning its restof-Africa business and adjusting to sometimes disruptive board changes.
More recently it had to cope with the pandemic, violent rioting and sluggish economic growth.
And then there’s the operational update for the six months ended January 2.
You’d be forgiven for thinking Shoprite was operating in something approximating a benign and challenge-free trading environment. A 10% hike in total merchandise sales to R91.1bn for the six months puts its competitors in the shade. The comparison is flattered by the impact of liquor store closures in the previous period, but even allowing for that there was an impressive 8.2% advance in merchandise sales.
The only operation that didn’t turn in a stellar performance was the OK Furniture and House & Home brands, which reported a 6.5% decline in sales. But that division accounts for just 4% of group sales, so getting it right won’t suck up huge amounts of management time.
Elsewhere it was impossible to see any signs of weakness in management’s long-term growth strategy. New stores have increased the group’s footprint and its rapidly developing home delivery service, Checkers Sixty60, is exposing the weakness of competitors’ offerings and helping to grow its high-end market share.
The nuts and bolts of the update are as follows: the all-important SA supermarkets business bumped up sales 11.3%; Checkers and Checkers Hyper pipped this slightly with an 11.4% sales increase; and, helped by a strong showing from Zambia, the group’s rest-of-Africa operations achieved an 11.4% advance in sales.
Keith McLachlan, investment officer at Integral Asset Management, says Shoprite is evidently gaining market share. “The group is humming, it’s hitting all the important milestones.” But he cautions against drawing firm conclusions about an improved comparative position at this stage. He notes that there are too many variables clouding the past two years and that “while consumers can switch from one to another, in the short term, retailers are not perfect substitutes for each other”.
Chris Gilmour of
Salmour Research describes Shoprite’s latest update as “superb”, and says the group is making strong inroads into the low end of the market but also chipping away at Woolworths’s traditionally dominant position at the top end of the food market.
“Shoprite’s top-end offering is not yet consistent, unlike Woolies, which has better control over the cold chain than any of its competitors.” But Gilmour says that unlike Pick n Pay, which seems to have given up on its high-end aspirations, Shoprite is sticking with it and making steady progress.
McLachlan says Woolworths is at risk from the lower price points offered by Checkers for high-end food products. “Woolies has an excellent offering, but in tough times some wealthy consumers are likely to be increasingly enticed by Checkers’ more competitive pricing.”
That enticement is likely to be supported by Checkers Sixty60, Shoprite’s home delivery service, which, McLachlan says, is head and shoulders above its competitors.
At R211.28 the Shoprite share price has more than doubled from the lows of the early Covid days, but it is still significantly off the R266 it touched in 2018. That was before its 2019 announcement that it was looking at a 20% drop in headline earnings per share (EPS).
While Shoprite’s share price might look a tad
expensive, the same cannot be said for
Lewis, which Gilmour says looks very cheap right now.
At R48.66 the furniture retailer is on a p:e of just under seven times. Remarkably, the recent trading update, revealing a 12.7% hike in merchandise sales for the nine months to endDecember 2021, initially did nothing for the share price. Evidently not even news of improved collections encouraged investor interest. Of course the comparison was helped by the fact that the group’s stores were closed for at least six weeks during 2020.
Still, the subdued response is surprising in light of the group’s strategy of paying out about 50% of its EPS in dividends, a figure that will be bumped up by the recent repurchase of 3.3% of its shares in issue. Perhaps it’s because Lewis shares have quietly stormed higher in the past year. Since the start of January, they’re up a modest 6.7%, but over 12 months the stock has rallied 97%.
Lewis still generates unease as an unsecured lender, not to mention the controversy over its steep insurance charges, but Sasfin’s David Shapiro believes it is one of the many SA counters overlooked by investors who’ve focused on the top end of the market.
“It’s always been a solid business, but right now, investors are ignoring these sorts of very good opportunities,” he says.
Shoprite’s topend offering is not yet consistent, unlike Woolies, which has better control over the cold chain than any of its competitors
Chris Gilmour