Less-bad is good
Spar’s trading update has been welcomed by the market which was clearly expecting worse. But debt and governance are still challenges
Spar’s better-than-expected trading update must have been a considerable relief for shareholders as well as the group’s overhauled top management. “The figures were soft but the market was expecting worse,” Peter Takaendesa, head of equities at Mergence, tells the FM.
Sasfin’s Alec Abraham says the trading figures weren’t too bad at all. “Things seemed to have improved in South Africa, which had become a major area of concern,” says Abraham.
The 9.7% increase in the group’s wholesale grocery business for the 18 weeks to January 28 was in line with the sector’s performance, which, says Abraham, is an improvement on previous periods when Spar lagged the sector. “This was a pleasant surprise as I thought Shoprite’s Sixty60 had taken market share from Spar, but it seems Spar has taken it back,” he tells the FM.
During the pandemic, when people were reluctant to venture too far from home, the Sixty60 delivery app ate into Spar’s traditional strength as the “neighbourhood” store.
The muted 1.6% rise in liquor sales, which was to be expected given the exceptionally high increase in the comparative period, held the core grocery and liquor turnover to 8.5%. This was further squeezed by the 2.8% decline in sales at Buildit.
Takaendesa says two major factors fed his low expectations for the group too much debt on the balance sheet and uncertainty about how to deal with load-shedding when it’s franchisees that are involved rather than corporate-owned stores. “And the ESG issues are also a distraction for management,” he says.
It has helped that new executive chair Mike Bosman appears to have made progress in resolving the high-profile dispute with some of Spar’s black franchisees. He’s also dialled down tensions with the Giannacopoulos family.
Takaendesa acknowledges the share price recovery from a low of R113 in January to R147 but notes it was off depressed valuations.
The group’s ambitious international acquisition spree is the primary reason Spar has transformed from a cash-pumping, dividend-paying operator to a debtaddled operation. And while the international banks have placed Spar in a vice-like grip, it hasn’t helped that bad debt provisions on the local front have spiked too. At September 2022 year-end the expected losses on trade debtors had shot up to R1.3bn on total trade debtors of R15.8bn. This was a staggering 49% hike on the previous year’s loss allowance of R854.4m. It has doubled since 2018’s R628.5m. It appears that much of the bad debt problem relates to retailers in the Western Cape and in particular Buildit franchisees. Group CFO Mark Godfrey tells the FM that early last year Spar noted that certain retailers in the Western Cape had increased their trade account exposure above specified, acceptable levels. “We immediately initiated rigorous actions to address the matter and to bring these account exposures back to within credit terms.”
Godfrey says much of the arrear trade debt arose during Covid and “was not appropriately managed by senior management in that region”.
The situation appears to have been complicated by the Covid-related border closures. A number of Buildit retailers in northern Namibia that rely on customers from Angola lost big slices of their turnover, “to the extent that [they] were significantly lossmaking for long periods”, says Godfrey. The necessary impairments for bad debt were made in 2022. “This is not going to be a quick resolution but we are working closely with each individual retailer and formal recovery plans are in place to recover the monies, which are being closely managed.”
It also appears that the retailers have signed acknowledgment of debt arrangements and that increased securities have been obtained.
Meanwhile, management is having to address the higher-profile challenge presented by Poland. Bosman, who will be travelling to Warsaw within the next week or so, has said Poland does present some exciting opportunities but tells the FM he is “very worried” about it. “I definitely need to understand it better.”
Abraham reckons the 4.6% increase in turnover is not too bad given that Spar terminated the contracts of 58 Polish retailers in July 2022. The retailers were dropped because of their refusal to purchase a minimum specified percentage of their sales from Spar. “From a profitability perspective, Poland should be a lot better,” says Abraham, adding that Spar has also closed one of its three distribution centres in Poland.
Over in Switzerland the decline in turnover was aggravated by the conversion of a group of corporate stores to independent retailers. Fortunately, Ireland turned in a strong 8.9% increase in turnover in line with expectations of a post-Covid recovery.
While the trading update was better than expected, Bosman and his co-directors are facing major challenges and have a tough year ahead. It’s time shareholders reconsidered the block on their fees.