Shoprite shares drop 6.33%: core customer base under pressure

Shoprite Holdings saw its share price slide 6.33% to close at R148.80 on Monday after it said its core South African customer base was under pressure from job cuts in the mining industry‚ rising electricity costs‚ general labour instability and a lack of job creation.

The country’s biggest supermarket chain said on Monday a 6.7% rise in turnover in the three months to September reflected slower growth in the group’s South African markets that made up more than two-thirds of operations. In the three months to September last year, the group raised turnover 12.3%.

Lentus Asset Management chief investment officer Nic Norman-Smith said on Monday the operational update was “pretty poor” amid a languishing domestic economy.

“It looks pretty weak all round‚ with particular weakness in SA compared with the rest of Africa (operations)‚” he said. “It is potentially in line with inflation‚ at best.”

Shoprite’s share price had looked expensive for some years‚ he said‚ and with a price: earnings ratio of about 20 times earnings he was “amazed it hadn’t taken more pressure”.

“The market has been very patient with large retail businesses‚” he said.

Shoprite said its core South African supermarkets grew sales 4.9% in the most recent quarter after internal inflation fell from 6% in the previous corresponding quarter to 3.4%. Non-South African supermarkets grew turnover 12.8%‚ despite lower commodity prices and currency devaluation in the group’s biggest African markets.

Fluctuating global oil prices‚ coupled with a much weaker rand had not significantly affected the group‚ Shoprite CEO Whitey Basson said on Monday. Shoprite also hedged on currencies and imported non-food products “long in advance”.

Nigeria was viewed positively by global investors‚ but they had “dropped their sights a bit”.

Meanwhile‚ the dollarised Angola market was “doing better” despite the oil price slump. “We are building like hell in Angola, in all the big cities‚” he said.

Shoprite had maintained a solid trading margin of 5.57% in the year to end-June – even though it incurred additional costs of R3-billion for electricity and security. Trading profit for the year had been 10.7% higher off an 11% rise in annual turnover to R113.7-billion.

Norman-Smith said in the past 10 to 15 years‚ previously underserviced consumers had benefited from easier access to capital and low interest rates‚ as Africa’s middle class grew and South Africa’s government payroll swelled significantly.

However‚ there would be tough times ahead‚ as evidenced by the slump in Shoprite rival Massmart’s interim results to June.

“The market needs to reset its expectations as to what kind of growth these kinds of businesses can deliver‚” he said.

Shoprite has 1762 stores‚ including furniture‚ pharmaceutical and liquor operations‚ of which 288 are outside South Africa. The group said its performance during the latest quarter was influenced by fewer store openings than in the previous corresponding period.

But there would be substantially more store openings in the remaining three-quarters of the year than in the same period last year.

Basson said he thought growth of the group was softer than the generally weak economic growth in the quarter.

He cited a “lot of irregularities”‚ including difficulties exporting goods into its Nigerian stores in an election year‚ and the dampening effect of the regional West African Ebola virus crisis on spending.