Shoprite Turns Low Prices into Higher Profits

Shoprite (SHP) had another strong year. The company grew mainly from selling more products and attracting new customers, rather than raising prices. In its South African supermarkets, prices increased only 0.8%, which was lower than the overall rise in food prices. Shoprite and Usave even lowered some prices, but the group’s product sales still grew 7.2% to R270.8 billion. Earnings per share increased 12.2%.

The biggest growth came from Checkers and Sixty60. Checkers and Checkers Hyper sales increased 10% to R105.2 billion. Sixty60, the on-demand delivery service, grew 34.5% to R25.5 billion.

Looking ahead, investors should watch whether Shoprite can keep moving higher volumes while keeping price increases low. They should also watch how successfully the company develops its two new businesses: R&A Cellular, which provides financial services, and Vida e Caffè, which operates coffee shops and quick-service restaurants.

Key Financial Metrics

Group:

●     Revenue: R274.8bn, up 7.1%

●     Merchandise sales: R270.8bn, up 7.2%

●     Like-for-like sales: Up 2.7%

●     Trading profit: R16.2bn, up 8.4%

●     Trading margin: 6%, compared to 5.9% previously

●     Headline earnings per share (HEPS): R15.27, up 12.2%

●     Cash generated from operations: R27.6bn

●     Full-year dividend: R8.73 per share, up 11.8%

Local Supermarkets:

●     Sales: R228.7bn, up 7.1%

●     Trading profit: R15bn, up 7.9%

Non-SA Supermarkets:

●     Sales: R22.8bn, up 11%

●     Trading profit: R684m, up 13.4%

Key growth areas:

●     Sixty60 sales: R25.5bn, up 34.5%

●     Checkers and Checkers Hyper sales: R105.2bn, up 10%

●     Shoprite and Usave sales: R121.6bn, up 4.3%

●     Adjacent-business sales: R1.9bn, up 57.4%

Analysis & Outlook 

Share Price Performance:

SHP trades around R315.27. The share price has increased 9.4% since August, is up 16% year-to-date, and has risen 19% over the past 12 months. This steady rise suggests that investors have confidence in Shoprite’s Checkers and Sixty60 growth, as well as the group’s ability to generate cash consistently. The board declared a final dividend of R5.66 per share, bringing the full-year dividend to R8.73, an 11.8% increase.

Shoprite remains a strong business, but the share price may already reflect much of its expected growth. The company’s results support a positive long-term outlook, but the current price does not leave a large margin for disappointment. Investors may want to wait for either stronger earnings growth or a more attractive entry price before buying, rather than chasing the share after its recent rise.

What Could Move the Share:

Upside:

●     Checkers premium growth — Checkers grew 10%, and FreshX now covers about 50% of its supermarket footprint. Further market-share gains from Woolworths Food and Pick n Pay could support a higher share price.

●     Sixty60 is becoming more profitable — Sixty60 has reached R25.5 billion in sales, growing 34.5%. More income from Xtra Savings Plus subscriptions and better delivery economics could turn Sixty60 from mainly a customer-growth tool into a stronger profit contributor.

●     New growth areas — R&A Cellular gives Shoprite exposure to financial services in the informal retail market. Vida e Caffè gives the group exposure to coffee and quick-service restaurants, with about 400 stores. These businesses could create new, frequent sources of revenue outside traditional grocery retail.

Downside:

●     Low selling-price inflation — South Africa’s internal selling-price inflation was only 0.8%, and Shoprite and Usave experienced price deflation. This means the group depends heavily on bigger sales volumes. If consumers reduce their spending, growth could potentially slow quickly.

●     Africa execution and currency risk — The Non-SA business faces higher power and diesel costs in Zambia, as well as the effect of weaker currencies, including the Mozambique metical.

●     Valuation and cost inflation — After rising about 19% over the year, the share price is close to available consensus targets. Electricity and water costs also increased by 19.2%, putting pressure on expenses and profit margins.

●     Competitive pressure — Pick n Pay, Woolworths Food, and discount retailers are all competing for the same customers.

Disclaimer:
*Any opinions, views, analysis, or other information provided in this article is provided by BROKSTOCK SA trading as BROKSTOCK as general market commentary and should not be viewed as advice according to the FAIS Act of 2002. BROKSTOCK SA does not warrant the correctness, accuracy, timeliness, reliability, or completeness of any information provided by third parties. You must rely upon your judgement in all aspects of your investment decisions, and all decisions are made at your own risk. BROKSTOCK SA and any of its employees shall not be responsible for and will not accept any liability for any direct or indirect loss, including, without limitation, any loss of profit which may arise directly or indirectly from the use of the market commentary. The content contained within the article is subject to change at any time without notice. BROKSTOCK SA is an authorised financial services provider - FSP No. 51404. T&Cs and Disclaimers are applicable: https://brokstock.co.za/
** This article was prepared by BROKSTOCK analyst Maboko Seabi