February 26, 2019 / 7:40 AM / 3 months ago

Shoprite cautious on improving outlook after worst first half in more than a decade

JOHANNESBURG (Reuters) - Africa’s largest supermarket group, Shoprite Holdings, said its outlook could improve after its worst first-half performance in more than a decade, hit by supply problems in South Africa and a currency devaluation in Angola.

Shoppers leave the Shoprite store in Daveyton, South Africa May 23, 2018. REUTERS/Siphiwe Sibeko

“Since January 2019, an improved sales trend is evident,” the group said in a statement on Tuesday, adding though that its weak trading in July-December last year meant it was unlikely to achieve growth for the full year ending in June 2019.

The supermarket and furniture retailer also said it aimed to simplify its share structure and was in talks with Thibault Square Financial Services Proprietary Limited to buy, redeem or cancel deferred shares held by Thibault, which owns 32.3 percent of voting rights.

South African retailers have struggled to lift earnings at home as high unemployment and household debt have squeezed consumer income.

Shoprite had fared better than many thanks to its focus on budget-conscious consumers, but it was hit in July-December by deflation in basic food categories and supply constraints stemming from strikes last May and June at its largest distribution centre in South Africa and a new IT system.

The company also faced rising costs across markets although investors took the view that the worst may be over and Shoprite shares, which have lost more than 10 percent since the start of this year, were up 5 percent by 1045 GMT.

Total group sales across Shoprite’s more than 2,800 outlets in Africa rose just 0.2 percent in July-December to 75.8 billion rand ($5.5 billion), while like-for-like sales declined by 2.7 percent from a year earlier.

More than half of the group’s business went live on an IT system, which covers inventories, orders and store operations, in the six months and that adversely affected product availability for customers, Shoprite said.

Estimated lost store sales resulting from stock issues exceeded 1 billion rand ($72.15 million) in the period, the retailer said.

In Angola, its fourth biggest market, an 85 percent currency devaluation against the dollar since the beginning of 2018 has depressed revenues.

The company had flagged much of the first-half weakness in a trading update last month, but diluted headline earnings per share for the 26-weeks to Dec. 30 of 398.5 cents, down from 525.6 cents a year earlier, fell short of a forecast of 419 cents in a poll of analysts by Refinitiv.

“Our first half performance is below expectations, but not a reflection of the fundamental strength of the business,” Chief Executive Pieter Engelbrecht said in a statement.

Cost increases in rentals, electricity, security, transport and additional labour costs, also taking into account inflation in Angola, hit the company’s bottom line, with trading profit down 19 percent to 3.3 billion rand.

Outside South Africa, the group’s Rest of Africa business reported a trading loss of 61.8 million rand, versus a trading profit of 552.7 million rand a year earlier, mainly due to the weak trading in Angola.

In a separate statement, the retailer said its talks with Thibault Square Financial Services would simplify its share structure and voting rights.

Shoprite’s capital structure currently consists of two share classes - Shoprite Holdings ordinary shares and Shoprite Holdings deferred shares - which carry about 32.3 percent of the voting rights of Shoprite, it said.

“The proposed transaction will simplify the company’s voting share structure and align the company with international best corporate governance practice,” it said.

Furthermore, the deal will ensure that all remaining shares in the company have equal economic and voting rights, it added.

Thibault is an investment vehicle of Christo Wiese, who is Shoprite’s majority shareholder.

($1 = 13.8597 rand)

Reporting by Nqobile Dludla, editing by Susan Fenton

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