Africa’s Biggest Grocer Slumps Most Since 1999 on Profit Warning

JOHANNESBURG (Capital Markets in Africa) – Shoprite Holdings Ltd. shares slumped the most since 1999 after Africa’s biggest grocer said first-half earnings dropped as much as 26 percent, with South African food deflation and IT troubles compounding weakness in the rest of the continent.

• Headline earnings per share declined between 16 percent and 26 percent to as little as 3.89 rand, the Cape Town-based supermarket operator said in a statement after the market closed on Tuesday.

Key Insights

• Shoprite has more than 2,500 stores throughout Africa, yet a considerable majority are in South Africa. That exposes the company to the depressed consumer environment in the continent’s most industrialized economy, which particularly affects its core lower-income customers.
• Alongside food-price deflation and rising costs in essentials such as electricity and security, Shoprite struggled with the introduction of a new IT system and some industrial action. There’s little sign of any economic improvement either, though the company insists it can rely on customer support for its brands.
• Elsewhere in Africa, Shoprite’s problems aren’t new. A massive devaluation in the Angolan currency (and, to a lesser extent, in Zambia and Nigeria) has hurt conversion to the rand and driven up import costs. Meanwhile, rents in many African countries are linked to the U.S. dollar.

Market Reaction

• The shares fell as much as 17 percent, the most since July 1999, and traded 9.5 percent lower at 161.50 rand as of 9:58 a.m. in Johannesburg.
• That extended a January decline to 15 percent, and the stock is down 33 percent over the past 12 months, compared with a 10 percent retreat on the FTSE/JSE Africa Food & Drug Retailers Index.
• Other South African retailers took Shoprite’s lead, with Pick n Pay Stores Ltd. falling as much as 4.9 percent. Spar Group Ltd. declined 3.9 percent and Woolworths Holdings Ltd. 2.4 percent.

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• “Shoprite’s high South African margin has been driven by a formula of low prices in ever-improving stores,” said Charles Allen, an analyst at Bloomberg Intelligence. Yet “availability issues, caused by an IT upgrade and strike, have hurt revenue” and “competition has improved, meaning that the company will have to work harder to regain momentum.”
• “Profitability has been affected by South African deflation and consumers under extreme pressure, as well as inflexible costs, many of which are fixed in dollars across other African countries,” said Alec Abraham, an analyst at Sasfin Securities in Johannesburg.