Shoprite CEO Pieter Engelbrecht PICTURE: HETTY ZANTMAN
Shoprite CEO Pieter Engelbrecht PICTURE: HETTY ZANTMAN

Shoprite’s shares fell to their worst level in more than three years after Africa’s largest food retailer reported a 20% drop in earnings and said it saw no immediate prospects of its troublesome non-SA operations returning to profitability.

In what Group CEO Pieter Engelbrecht described as a "testing year" in SA, the company was also held back by foreign-exchange shortages and currency devaluations in other markets, as well as rampant inflation in Angola.

While sales from domestic supermarkets rebounded in the second half, the international supermarkets division made a full-year trading loss of R265m.

On Tuesday the share price recorded its worst one-day drop since January 30 2019, plunging 9.25% to R126.86, its lowest level since January 2016, leading other retail stocks lower.

Pick n Pay fell more than 5% to its weakest level since October 2017.

"When a company disappoints, the share price reactionis harsh," said Razeen Dinath, head of equity at Cadiz Asset Management.

Shoprite is reining in capital expenditure in the rest of Africa and closing unprofitable stores, Engelbrecht said, in a bid to cut costs, although the company is committed to finding opportunities on the rest of the continent. The group operates in 14 markets outside SA.

Separately, Shoprite said in a statement that "persistently challenging trading conditions in the year ahead are likely to hamper our ability to return to profitability" in the rest of Africa.

Thanks to a stronger second-half showing from SA supermarkets, full-year sales were up 3.6% to R150.4bn. However, trading profit was down 14.3% to R6.9bn and an increased effective tax rate — to 32% from 28.9% — brought the earnings drop to 19.6%. The group said that it would pay a final dividend of 163c a share, taking the total dividend for the year to 319c, a 34.1% decline.

The owner of Checkers and U-Save said it had maintained its sales momentum from supermarkets in SA since the end of June. The U-Save chain was "reaping the benefits of our restored in-stock position".

Goldman Sachs said the decline in SA supermarkets’ profitability is slightly worse than it had expected and that the non-SA trading margins are also weaker than expected.

"Performance of the furniture and other segments also deteriorated more significantly than we expected," Goldman Sachs said in a research note.

It was not optimistic on the 2020 outlook because of weak cost controls and the "challenging situation in broader Africa" where the company does not expect to return to a positive trading margin.

Engelbrecht told analysts at a presentation in Cape Town while the group remains committed to its assets in the rest of Africa, this is "not at all costs".

Dinath said the currency weakness in the African operations increases the risk to Shoprite’s earnings and reduces its dependability as a defensive food retailer. The more volatile earnings justify a lower rating for the share. "We do, however, believe that Shoprite is trading at an attractive price."