Shoprite expected to expand after paying shareholders

Shoprite’s expansion for the next financial year will be its biggest to date as it invests in upgrading its supply chain, opens 275 new stores and experiments with new chains such as Outdoor that can benefit from its distribution network.

The group, with almost 3,000 outlets, is opening 220 stores in SA, 95 of them under the uSave or Shoprite brands aimed at the lower-end of market, the country’s fastest-growing segment of consumers. At the same time, competitor Pick n Pay is increasing the rollout of its Boxer discount supermarket chain and rebranding its lower- to mid-level stores. The Shoprite group’s capital expenditure will total R5.9bn, up from R5.4bn in the year to July 3.

While its focus is on its core grocery market, the retailer keeps adding products and brands, and now owns 47 Pet Science premium stores, a few stand-alone baby stores called Little Me and an outdoor camping-style store in Hermanus in the Western Cape.  SA’s biggest retailer also offers a low-cost bank account to lower-income groups.

CEO Pieter Engelbrecht said at the group’s annual results: “The plan is to increase our share of consumers’ wallets by offering better alternatives and cheaper products.”

He said its core grocery business gives it the customer data of more than 17-million loyalty card members to work out what products are in demand that it can add or increase. “We see opportunities, and we’re going after them. That’s always been the style of Shoprite ... just to try different things and to fail fast if it doesn’t [work],” he told Business Day.

The group grew sales 9.65% to R184.1bn in its 2022 financial year and paid a full-year dividend of R6 a share, which is 10.3% higher than previously. It recorded a 6% operating margin, only a little lower than Woolworths’s foods operating margin of 7.2%, which is expected to be higher due to the prices of premium groceries.

Engelbrecht called the Shoprite group operating margin “world class”. He also explained why they were trying out an expansion into the outdoor space.

Login to view Shoprite Holdings Limited (SHP) shares

on EasyEquities

“What I’ve just seen in the market is that the stores that we deem are outdoor stores are mostly clothing stores with some gadgets.”

He said they were not real outdoor stores with sufficient camping or outdoor sports equipment.

Despite reporting a diluted headline earnings per share increase of 10% to R10.48, the share price dropped as much as 9.3% in intraday trade, closing 7.49% lower at R217.63. This was its biggest one-day fall since November 2020. Shoprite’s share is considered more expensive than those of other retailers.

In a note, Investec analyst David Smith described the share price drop a “knee-jerk reaction” which “appeared overdone”. All Weather Capital analyst Chris Reddy, who was pleased with results, said the share price drop was probably because earnings and profit were lower than the expected consensus had been, with a perceived slowdown of sales in the second half.

The group reported a 52-week financial period compared with 53 weeks previously.

Once an adjusted comparison is done, the second half appears much better, Reddy said. He said that investors may have been spooked by one-off expenses such as an unrecoverable 2021 riot cost of R145m that was not reimbursed by insurance, in addition to employee ownership scheme costs. Engelbrecht said in a call to Business Day that he thought the share price dropped because analysts might have missed the R128m cost of the employee share BEE scheme, announced in May.

The worker scheme, which increases black ownership to just more than 19%, will buy shares worth R8.9bn over 10 years that will remain in a trust, with workers paid out as if earning dividends. Shoprite said at time that the cost would equal about 2.7% of headline earnings. The employees will get their dividend-style payouts for the first time this year.

The share price drop aside, Engelbrecht was pleased with the group’s performance. “For us to have been able to maintain a 24.5% gross profit margin and stay the cheapest supermarket in the country and gain that amount of market share basically shows the [healthy] state of the business.”

Shoprite reported a R6.2bn market-share gain, the biggest in its history, with 40 successive months of growing market share, according to research firm NielsenIQ. Engelbrecht said the R2.9bn of market share gains was a result of Checkers taking sales from all three competitors: Spar, Pick n Pay and Woolworths.

Showing just how much the costs of doing business in SA is rising, Shoprite saw operating costs increase 16% due to water and power inflation, the R145m riot cost not covered by insurance and an increase in advertising and security costs. Petrol rose 43.6% in the financial year.

In-store inflation for the year hit 3.9%, much lower than official food inflation of 6.5%. Shoprite spent R856m keeping frozen chicken pieces and rice prices lower.Shoprite said that it expected 2023 to remain challenging for SA consumers because of higher borrowing and food and transport costs. Engelbrecht thinks food inflation could spike to as much as 10%. Product inflation in July, after its year end, was 7.2%.

Login to view Shoprite Holdings Limited (SHP) shares

on EasyEquities

Informed decision 

We found this article useful and insightful to share with the community because, despite the current inflationary headwinds, the company has proven to have pricing power during these times when the cost of living remains high. This may allow the company’s earnings to remain stable through the financial year. When is the dividend being paid? The last trading date for this share is 27 September 2022, with the payment date being 3 October 2022.

View dividend update here or below