Things don’t all go right for Shoprite
Retailer cuts dividend and profit drops as shoppers tighten belts
● Shoprite cut its dividend for the second year in a row to conserve cash in a tough trading environment.
The retailer has a long history of increasing its distribution to shareholders and this is the first time since its listing on the JSE in 1986 that the company has tightened the screws for two consecutive years.
The company on Tuesday reported a drop in profit for the year to end-June, a period CEO Pieter Engelbrecht called a “testing” one.
Not only did feeble economic growth and record unemployment weigh on shoppers’ disposable income, but sales were disrupted by a strike at the retailer’s distribution centre in the first half of the year.
Though Shoprite is the largest retailer in Africa, its South African supermarkets still dominate the business, representing threequarters of total sales.
“A constrained economy, inventory shortages post industrial action and the implementation of a new enterprise-wide IT system across our store base resulted in lost sales,” said Engelbrecht in a statement.
It had the effect of a 19.6% drop in headline earnings per share to 779.9c. And in response, the retailer slashed its dividend to 319c from 484c.
But Shoprite is not alone. Rival Massmart, with its Game and Makro stores, flagged earlier this month that it will report its first halfyear loss since the early 2000s due to disappointing sales.
The whole retail sector is plagued by consumers’ “new, more scientific approach to promotions”, says Investec Asset Management’s co-head of retail funds Hannes van den Berg.
Cash-strapped shoppers scan leaflets and online advertisements and flock to stores to buy heavily discounted goods but very little else, he adds.
This depresses revenue, as retailers cannot rely as much on the cheaper products to lure consumers to do a full-trolley shop at their stores.
Shoprite’s local supermarkets grew sales by 4.9%, but after accounting for new store openings, the increase is a more modest 1.9%.
Another trend is consumers’ strategy of sticking to essentials.
Shoprite gave a flavour of this when it revealed earlier this year that shoppers for the first time spent more on back-to-school products than toys over the December holidays. These numbers are contained in this set of results and add to a dismal first half of the financial year. In the second half, Shoprite fared considerably better, with the last quarter showing sales growth of 9.4%.
But the lower dividend and drop in profits shocked investors on Tuesday. Shoprite shares dropped more than 8% on the day to R126.80.
Now Shoprite is even considering letting go of some of its businesses.
Engelbrecht says the company is “critically assessing capital expenditure and, where appropriate, selling selected assets to redirect capital towards future growth projects”.
Since Engelbrecht took over as CEO from long-time boss Whitey Basson in 2016, he has increased the company’s exposure to wealthier consumers.
Higher-income groups are more resilient in times of low economic growth as they spend a smaller proportion of their income on groceries.
This is why Shoprite has been repositioning itself to rake in more spending from the well-to-do, especially with its Checkers stores. The company has been rejigging some of them to offer an expanded premium foods selection. Some 21 stores are now in this format — called FreshX.
“We are most pleased with returns from these upgrades and, therefore, our mediumto long-term target of 80 stores in this format remains unchanged,” says Engelbrecht.
Operations elsewhere in Africa, where Shoprite has a presence in 14 countries, most notably in Angola, also disappointed.
Supermarkets outside SA reported a trading loss of R265m for the year, representing a sharp reversal from several years of buoyant sales.