Shoprite released impressive FY20 results on 8 September, which saw its share price ending the day 10.8% higher. In a challenging year, the retailer recorded a 6.4% YoY jump in turnover to R159.6bn despite the COVID-19 induced lockdown restrictions. Still, it was a messy set of numbers with hyper-inflation, forex translation, discontinued operations, and IFRS adjustments making it difficult to get a clear sense of the true earnings performance of the Group.
However, fortunately for Shoprite these results were not significant because of the company’s earnings performance but rather due to the strong cash generation and degearing of the balance sheet. The degearing was remarkable as much for the quantum, as for the speed at which Shoprite was able to achieve this. According to management, much of the degearing success is due to the Group’s new SAP system, which has allowed Shoprite to release R6.1bn in working capital in just 12 months! The Group also managed to reduce its inventory-to-sales ratio to 12% from 14.2% in FY19. Shoprite is guiding for this ratio to remain constant at 12% going forward.
The other key contributor to the strong cash realisation was the more efficient allocation of capital. With the Group moving away from a growth-at-all-costs approach in Africa, capital spending declined by R2.1bn for the period under review. Shoprite spent R3.2bn in FY20, of which R2.5bn was spent in SA, while only R0.7bn was spent in Africa. The company guided that its capital spending will increase to R4.8bn in FY21, with the largest contribution again going to SA.
This has allowed the Group to lower its net borrowings from R8.1bn in FY19 to R2bn in FY20. Management did not provide any guidance on what they believe the best gearing ratio will be but, given Shoprite’s current cash generation and lack of significant capital requirements, we believe the retailer will start to reduce its cover ratio or even begin a share buyback programme within the next couple of years.
Although Shoprite is the largest food retailer in SA, we still see some growth opportunities for the Group over the next few years. These growth initiatives are Checkers, Online, LiqourShop, and the rationalisation of its Africa operations. Below we highlight the performance of each of these operating segments.
Checkers
- Checkers recorded a strong FY20 performance, growing revenue by 16% YoY. This compares very favourably to Woolworths Food, which has recently guided that its revenue grew by 13% YoY.
- Checkers has also invested heavily in its fresh offering and this is starting to pay real dividends.
- The Group’s Xtra Savings card has exceeded all expectations, already signing up 5mn members. The card and the corresponding app are allowing Shoprite to provide personalised offerings to its customers at scale.
- All the above has resulted in Checkers gaining market share vs its competitors in every month of FY20.
Online
- Shoprite admitted that the timing of its acquisition of the app Sixty60 was very fortunate. It acquired the team in August 2019 and immediately provided significant capital to scale up its operations. Shoprite launched the offering nationwide in February 2020. The timing could not have been better as lockdown commenced on 27 March.
- The success of the app is unprecedented in SA, and its acceptance by customers was almost immediate.
- The company has continued to roll out this service to more areas and it still sees significant future growth potential.
- In August, Shoprite started to charge R35/delivery and it still did not see any drop-off in usage.
The LiquorShop
- Revenue for the LiquorShop declined by only 3.3% YoY in FY20. This is an incredible performance especially considering that these stores were closed for 79 trading days in FY20.
- Currently the LiquorShop has a single-digit market share in SA vs Shoprite’s 23% market share in local food retail. We believe that the LiquorShop offers Shoprite exciting growth opportunities as it increases its market share to similar levels as the company’s food retail market share.
The rationalisation of its Africa operations
- Shoprite made impressive strides in rightsizing its Africa operations over the past 12 months.
- The decision was made that all Africa operations be self-funded, or the Group would exit this segment.
- As such, the decision was taken to sell its operations in Nigeria, with negotiations well advanced, and Shoprite will also be exiting Kenya in the near future.
- Shoprite has managed to renegotiate 48 rental agreements across its African regions, with rentals either being reduced or de-dollarised.
Looking at the sales performances of Shoprite’s various business segments, we highlight that these growth drivers can help the Group achieve high single-digit to low double-digit earnings growth over the medium term. With Checkers contributing less than 40% of its total SA sales and the LiquorShop less than 6% of total SA sales, we believe that these two higher-margin business units can help Supermarkets RSA improve its trading margin over the medium term. This, in combination with Supermarket Non-RSA, which is still loss-making, offers some real growth opportunities for Shoprite as a Group. In our view, this can be achieved while the Shoprite brand continues to generate significant amounts of cash. We believe these results are a turning point for Shoprite. The Group’s new CEO has pivoted the company from being a growth-at-all-cost business to a far more efficient and return-focused business. We expect that, if Shoprite continues its current path, its share price can re-rate significantly from current, reasonably depressed, levels. We would recommend buying the share to participate in this re-rating.
This was the result presentation where Shoprite’s new CEO, Pieter Engelbrecht made clear what he wants his legacy at Shoprite to be. In our view, under his leadership, Shoprite is going to pivot from the “Africa-growth” story to the cash-spitting SA and Africa retailer with some growth. In fact, we can see a very likely scenario where, if Shoprite continues in the current vein, it may even start to get a Clicks-like rating (at a discount because it will have lower growth). Shoprite still has much to prove before the aforementioned scenario can become a reality, but it has a clear strategy, true intent, and it has started to hit its targets already and we are therefore inclined to give it the benefit of the doubt. With significant prospects for return on capital (ROC) expansion through better capital allocation, we believe that this is a share we can start to back once again for a medium- to long-term growth and re-rating story.
