Shoprite’s results for the 53 weeks to July 2021 have landed and they didn’t disappoint, with the share price closing 2.57% higher on the day.
When the country’s largest private sector employer releases results, people pay attention.
Before we get into the result…
Unfortunately, a 53-week result is one of the frustrations in the retail sector. Many retailers elect to report on a 52-week basis (rather than a typical financial year), as this ties in well with their systems and how they run the businesses. 52 multiplied by 7 is only 364, so you may be wondering what happens to the extra day each year (or two, in the case of a leap year).
Eventually, the maths works out that the company has to report on a 53-week basis every few years. This makes it difficult to compare the result to the prior year, as an entire extra trading week plays havoc with annual growth rates etc.
The other challenge with retailers is that the trading week doesn’t always end at a similar point in the calendar month. A year-end after a calendar month-end would reflect a totally different balance sheet to a year-end before a calendar month-end.
I know that sounds terribly confusing. Let’s do an example to demonstrate the point.
Imagine a reporting period that ends on the 2nd of March, but the prior year’s reporting period ended on 28th February. In the prior year, month-end payments to creditors wouldn’t have gone off yet, so the balance sheet would be full of cash and amounts owed to creditors. This year, the cash would all be gone and so would the creditors, so the balance sheet ratios would be completely different to the prior year.
Be careful of calculating ratios like days payables or days receivables in retailers. You need to check if there has been a “cut-off” issue that limits comparability, as in the example above.
With those nuggets of information out of the way, let’s look at Shoprite’s result.
The market leader is charging forward
On a comparable 52-week basis (i.e. adjusting for the extra week in this reporting period), Shoprite added R9.1 billion in sales to its business this year. Although percentage growth is obviously far more helpful for investors, we sometimes need to take a step back and just acknowledge the sheer scale of these businesses.
That percentage increase is 5.9%, which was dragged down by a 9.5% decline in Supermarkets Non-RSA. Supermarkets RSA (80% of group revenue) grew by 6.9%, showing how much opportunity there still is in Shoprite’s home market. The Furniture business is small but recovered strongly, up 22%.
This was a watershed year for Shoprite’s business in Africa. The Nigerian business was sold, the operations in Kenya were closed and the operations in Uganda and Madagascar were classified as discontinued.
Shoprite isn’t leaving Africa entirely but is clearly taking a much stricter approach to capital allocation in the region. This is in line with the strategy of many JSE-listed companies that are dealing with the fallout of years of poorly disciplined capital allocation into African and offshore markets.
Checkers makes a song and dance about the digital tech hub, which has launched “industry-leading innovations” like Xtra Savings (the rewards programme) and Checkers Sixty60 as an on-demand grocery service. The concept of a rewards programme was innovative back when BlackBerry was the phone to have, so I’m not sure what the fuss is there.
Sixty60, however, has been nothing short of brilliant. It is the top grocery app in the country with 1.5 million app downloads and I would speculate that the service is doing serious damage to competitors. The standout loser for me in this is Spar, which doesn’t have an on-demand service and has built its business around consumers who need convenience shopping solutions. That solution is now a delivery bike rather than a store in a mall with easy parking, which is historically Spar’s strength.
Shoprite’s trading margin grew from 5.3% in the prior year to 6.1% this year.
With a store format that services every level of household income and an immensely powerful engine sitting behind those stores, betting against Shoprite probably isn’t the smartest move.
Having said that, the share price is up over 40% this year and the valuation isn’t cheap. If Shoprite maintains its focus on its core operations and home market, it could at least make up for the wayward years which saw shareholders suffer nearly a 60% decline from March 2018 to the start of 2020.
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