Shoprite: priced for perfection and delivering it

Shoprite has released results for the 26 weeks to 2nd January 2022.

The company has been on a charge, positioning itself as the darling of the grocery sector. That certainly wasn’t the case just a few years ago, so I will use this opportunity to remind you of how quickly things can change in the market.

Shoprite is flying in the South African market, posting huge growth of 11.3% in the supermarkets business (which contributes 79.5% of group sales). This is despite two of the Checkers Hyper stores being closed since July’s civil unrest.

There’s a base effect in this number, as LiquorShop (7.4% of the segment) increased sales by a whopping 49.8% thanks to fewer alcohol restrictions. Checkers and Checkers Hyper contributed 40% of segmental sales and grew by 11.4%, an impressive result reflecting ongoing market share gains among higher-LSM shoppers. Shoprite and Usave (52.5% of the segment) increased sales by a respectable 7.3%, demonstrating the group’s continued relevance among lower-LSM shoppers. The group disclosed 12.1% growth for Usave specifically, so there is double-digit growth being achieved at the top and bottom of the LSM curve.

These numbers were achieved with just 2.6% selling price inflation, so the supermarkets are pushing serious volumes through the door. New stores are also being rolled out, with a net 62 stores opened during the six months, creating 1,949 new jobs.

There are 23.1 million Shoprite and Checkers Xtra Savings Reward Programme members. Just let that number (and the associated data) sink in…

Although no disclosure is given of growth in Checkers Sixty60, they do describe it as being “very successful” and my anecdotal experience of the service supports that. The group has a deal with RTT Group to establish a new company for the on-demand logistics business, cementing the underlying operations in that channel.

The group is also experimenting with new store formats, opening twelve PetShop Science and one Little Me stand-alone baby store. I’m watching that with interest, as there’s a huge profit pool in baby clothes and products (I experienced that first-hand in the past two years!)

Beyond the Supermarkets RSA segment, the story is solid in Rest of Africa (sales growth of 8.4%) and in the Other Operating Segments (up 8.9%), but the Furniture segment has had a tough time with sales down 6.5%. This was attributed to the civil unrest and a high base during which people were stuck at home and buying new furniture.

Gross margin was consistent in the group at 24.1%, with expansion in Supermarkets RSA and a minor contraction in Supermarkets non-RSA. Checkers and Checkers Hyper are higher margin businesses, so outsized growth in those formats would improve the margin mix.

At group level, continuing operations recorded revenue growth of 10%, trading profit growth of 14.5% and headline earnings per share (HEPS) growth of 25.5%. The discontinued operations are in Kenya, Uganda and Madagascar.

The dividend is up 22%, nearly matching the increase in HEPS. The interim dividend is 233 cents per share, just over 1% of yesterday’s closing price. Notably, R854 million was invested in share buybacks in the past year.

Return in invested capital increased from 11.3% to 13.3%. The debt/equity ratio decreased from 27.9% to 22.9% as the group pumped cash through the system (R6.7 billion of it in the form of cash generated from operations).

The share price is up over 9% this year and more than 60% in the past 12 months. Shoprite is trading on a lofty price/earnings multiple as the market has piled into this stock. It is priced for perfection and seems to be delivering it.