Spar makes a splash overseas
Spar’s Southern African and overseas operations have produced good numbers and more stores are planned in SA
When retailer Spar Group expanded into Ireland and Switzerland, many wondered whether it was making a mistake, says CEO Graham O’Connor.
There was good reason for concern. SA grocery retailers (besides Shoprite) have not been all that successful abroad. Woolworths and Pick n Pay got into a world of trouble when they bought chains in Australia.
However, Spar’s overseas forays have been mostly successful so far. Its Irish operation has gone from strength to strength, with turnover rising from R16.89bn in 2015 to R22.49bn in the year to end-September 2018. There was a similar story with profit before tax, which jumped from R182.1m to R537.9m over the same period.
The performance of the Ireland operation was indicative of the group’s performance for the 2018 financial year.
Overall, Spar’s revenue rose 6% to R103bn and operating profit increased 7.9% to R2.77bn.
Spar’s Southern African operation also produced strong numbers in a difficult economy, increasing turnover 6.7% to R68.8bn. Operating profit rose to R2.1bn.
The group’s domestic results were boosted by the acquisition of pharmaceutical wholesaler S Buys. This added R929m to turnover. Growth in DIY chain Build it increased its turnover by R550m to R7.57bn. The liquor operation, Tops, also impressed. Its sales rose 13% to R6.5bn. "People drink when they are happy. They drink even more when they are sad," O’Connor says.
Though its Swiss operation has not been as lucrative as its Irish business, it is showing some signs of a turnaround.
O’Connor says it has disposed of its underperforming stores, which resulted in turnover in Switzerland falling from R11.2bn to R9.6bn, but this move led to operating profit rising from R95.2m to R124.6m in that country.
O’Connor might be convinced that the Swiss business has turned the corner, but some want to see more proof.
Arqaam Capital equity research analyst Daniel Dias says: "We are really happy with the group operationally. However, we require more evidence of the operational turnaround in the Swiss operations."
The group did perform well operationally, but in net profit it achieved only a marginal increase of 0.4% to R1.82bn. It recorded a similar rise to 948.9c in EPS.
The market seems rather fond of the group. Though its share price is up only 2.6% to R182 for the year, it is trading at a forward p:e of 16.4. By comparison, Woolworths is down 0.47% to R52.93 and Shoprite has sunk 10.3% to R187 for the year. Of the grocery retailers, only Pick n Pay, which rose 16.4% to R69.77, performed better over the period.
The modest rise in Spar’s share price is reflective of the difficult trading conditions retailers are experiencing. Stats SA reported a 0.7% rise in year-on-year sales for September.
This difficulty can be seen in Spar’s local retail sales rising only 2.3% in like-for-like sales. It looks even starker when measured against an internal food inflation rate of 1.4%. This inflation measure has declined from the 1.9% measured at half-year and the 6% reported in 2017.
Even though trading in SA has not been easy, Spar is committed to growing the number of stores, especially black-owned ones. It has found that it’s easier to fund these stores out of its own pocket than partnering with a financial institution. The Public Investment Corp (PIC) initially agreed to give it R470m for the expansion, but three years after it made this offer this money was yet to be forthcoming. The PIC also wanted to make these loans available at prime plus two percentage points.
"We thought: ‘Thanks very much, [but] we can do better than that ourselves.’ It was really disappointing," O’Connor said during a results presentation last week..
It resulted in Spar offering discounted loans at prime less four percentage points to potential black franchisees. This is the primary reason why loans rose from R406.2m to R696.4m on its balance sheet.
Spar increased its store network by 145 to 2,236 stores. It also completed 276 store upgrades across all brands, compared with 259 upgrades in the year before.