EDITORIAL: Debt-laden balance sheet compounds Shoprite woes
Group’s enormous capital expenditure over the past few years was always going to be a strain
It’s never a good time to have a debt-laden balance sheet. But August 2019 was probably the worst time in Shoprite’s 40-year history to reveal a disturbing increase in borrowings. The revelation coincided with a disappointing 19.6% drop in profit for financial 2019. In recent months JSE investors have become hypersensitive to debt; the combination of high debt and declining earnings is just the prompt they need to abandon a share.
The debt wasn’t quite out of nowhere: the group’s enormous capital expenditure over the past few years was always going to put some strain on a balance sheet more accustomed to gearing in the low twenties. But a 68% increase in borrowings at this stage of the economic cycle has created jitters among even diehard Shoprite fans — of whom there are still many.
Making matters considerably worse is that more than 60% of the debt is dollar-denominated and prospects for dollar-based income from outside SA, where currencies are even more volatile than the rand, are looking particularly grim.
It didn’t help that stock levels were unusually high. Few were persuaded by the company’s defensive explanation that it was keen to avoid a repeat of the stock-outs that caused so much disruption in the first half of the financial year. The hefty spending of the past few years included state-of-the-art IT systems that should have helped pare back stock levels without risking on-shelf availability.
There were encouraging but not entirely persuasive signs of improvement at its SA operations. But right now the real threat to long-term earnings lies outside SA. Shoprite has outperformed all of its competitors in non-SA Africa, but for varied reasons, largely beyond its control, it is now battling turbulent conditions in most of those countries.
The investment community was unforgiving, as is invariably the case when one of its darlings disappoints. The share price ended the week 17% lower, taking it to levels last seen in 2011.
The rush to sell appears to have been led by foreign investors and may have had as much to do with US President Donald Trump’s bizarre tweets as with Shoprite’s debt-laden dull prospects. It was little comfort that the selling hit most of the retail sector.
Not only has Basson departed but most suspect Wiese is now far too distracted by Steinhoff-related issues to play a significant role
Ten years ago, foreigners chased SA equity prices sky-high. Retail shares were a particular favourite, none more so than those such as Shoprite, which offered access to Africa’s much-touted exciting growth prospects. Walmart’s purchase of 51% of Massmart represented the apex of this ill-considered investment binge.
Unsettling developments on their home front and, to a lesser extent, the failure of the African growth story to materialise, sees these investors determined to get out at any price. Last week Shoprite found itself caught up in this rush for the exit. It was less equipped to cope than at any time in its 40-year history.
Inevitably there was talk of the loss of former CEO Whitey Basson, who after 37 years retired in 2016. Shoprite’s success is largely down to Basson’s skills and blustering determination combined with a supportive and engaged controlling shareholder in Christo Wiese. Not only has Basson departed but most suspect Wiese is now far too distracted by Steinhoff-related issues to play a significant role.
Certainly having a familiar pair of hands at the helm might help settle some frayed nerves. It was Basson who pulled the trigger on the ambitious decisions behind much of 2019’s challenges. In hindsight Basson’s decision to bail, apparently prompted by a desire to avoid the planned tie-up between Shoprite and Steinhoff, looks like another stroke of timing genius, particularly as a previously little-known contract enabled him to sell his shares to the company at R201 apiece.
But most of the current crop of top executives have been at Shoprite for more than 20 years; they know the group well. They may not have been through times quite this tough but they should know enough to keep their nerve.
Plans for the sale and leaseback of distribution centres will certainly help ease the critical debt burden, but focusing on what made the group great is essential.
Given the political and economic uncertainty facing investors and consumers globally, it’s likely to be a long time before Shoprite enjoys the sort of rating it did as recently as March 2018. But all things considered its price-to-earnings rating of 15 times is not too shabby.