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SHOPRITE HOLDINGS LIMITED
(Reg. No. 1936/007721/06)
(ISIN: ZAE 000012084)
(JSE Share code: SHP)
(NSX Share code: SRH)
(LuSE Share code: SHOPRITE)
(“Shoprite Holdings” or “the Group”)
Key information
- Trading profit was up 27,6% to R1,598 billion
- Turnover increased 16,2% from R33,511 billion to R38,950 billion
- Non-RSA supermarkets achieved 29,4% sales growth
- Diluted headline earnings per share from continued operations rose 33,3% to 194,3 cents
- Total dividend per share envisaged to increase 38,4% to 101,0 cents
Whitey Basson, chief executive, commented:
The results of the supermarket division were affected by industrial action during the first quarter of the financial year. A decline in supplier service levels affected stock availability, but was somewhat countered by the performance of our supply chain through our own distribution centres. Our management and staff have performed exceptionally well under these conditions and were assisted by a buoyant market. Our operations outside South Africa are performing well and the results underpinned our belief that the continent will produce excellent results over the long term. Our number of stores and geographic spread across Africa are well positioned for future growth.
28 August 2007
Enquiries:
Shoprite Holdings Limited
Tel: 021 980 4000
Whitey Basson, chief executive
Carel Goosen, deputy managing director
De Kock Communications
Ben de Kock
Tel: 021 422 2690
Cell: 076 390 7725
Operating environment
The period under review continued to be a time of high consumer spending in South Africa, on food but also on durable and semi-durable goods. The spending spree was fuelled, inter alia, by the growing disposable income of a burgeoning black middle class, popularly referred to as the “Black Diamonds”, which has as its wellspring the Civil Service and the business community. Cash sales reached record heights while lenders extended credit facilities to all and sundry in the months leading up to the introduction of the National Credit Act. Initially consumers seemed undeterred by the several increases in interest rates, but towards the end of the period there were signs that spending on particularly durable goods may have peaked. During the reporting period food inflation as part of CPIX rose to an average of 8,5%. However, it was substantially higher in certain food categories such as meat, dairy and maize products.
Comments on the results
Income statement
Total turnover
Total turnover increased by 16,2% from R33,511 billion to R38,950 billion. The increase resulted mostly from the higher disposable income of a growing black middle class, new store openings and aggressive promotions in the major chains. Among lower-income consumers the absence of the National Lottery also channelled more money into food sales.
Gross profit
Although the Group’s focus remains on basic food items at the most competitive prices, it also responded to consumers’ demand for a more extensive offering of perishable and value-added products with their higher margins. These contributed significantly to the 17,7% increase in gross profit, as did the continued strong sales of non-food lines.
Expenses
A major contributor to the increase in expenses was the aggressive store opening and refurbishment programme. The 10,1% increase in staff costs was offset by the growth in staff productivity.
Trading profit and margin
The trading profit growth of 27,6% is the result of the strong growth in turnover combined with the continuing advances in operational efficiencies.
The trading margin increased to 4,1%, a factor of strong top-line growth and low cost inflation. Although most pleasing, being the highest ever achieved by the Group, management cautions against a further improvement thereof should consumer spending decline.
Interest received and finance costs
Net interest income was up due to the improved cash flows and increases in interest rates.
Exchange rate gains
These are attributed to the rand’s slight strenghtening against the US dollar and the strengthening of the currencies of certain African countries in which the Group operates. A gain of R23,7 million as against R8,4 million in 2006 was achieved in the review period.
Income of a capital nature
The income of a capital nature of R60,9 million relates mainly to profits realised from the sale of properties and the listed investment in ApexHi Properties Limited.
Tax
The effective tax rate decreased marginally from the previous year.
Dividend envisaged
It is envisaged that a final dividend of 66,0 cents (2006: 46,0 cents) per share will be declared during October 2007. The Board is committed to its policy of two times cover on headline earnings per share.
Balance sheet
Intangible assets
The increase in intangible assets relates mainly to the investment in the Group’s new back-office computer systems. It is envisaged that this project will be completed in the next two financial years.
Inventories
The increase of 13,1% in inventory to R3,699 billion resulted primarily from buoyant sales, the need to provision new stores, higher food inflation and particularly from the need to stockpile products in the Group’s distribution centres to counter the drop in supplier service levels.
Cash and cash equivalents
A favourable balance sheet closing date produced a temporary surge in net cash and cash equivalents from R0,537 billion to R1,988 billion and should be read with the increase in trade creditors.
OPERATIONAL REVIEW
The past financial year was a period of strong growth across all sectors of the business. Despite industrial action that disrupted operations in South Africa in the first quarter of the financial year, all three retail food chains performed well while our businesses elsewhere in Africa are consistently increasing their profit contribution. The shift in demographics, which has seen the emergence of an ever-expanding black middle class in South Africa, is continuing to benefit Shoprite in particular, impacting on both turnover and profitability. To accommodate the upsurge in demand, the Group continued its comprehensive store refurbishment programme which also saw the introduction of a wider range of aspirational and lifestyle products. The improved product offering was complemented by extended service departments and promoted by a robust marketing programme. The Group also continued opening standalone liquor stores and in-store pharmacies.
RSA supermarkets
The Group’s supermarket operation in South Africa, encompassing three chains – Shoprite, Checkers and Usave – forms the core of the business and represents 79,9% of total turnover. All three chains performed well, growing turnover by 15,0% to R31,134 billion. The number of customer transactions increased by 7,3%, while the average growth in value per transaction was 7,1%. However, sales were hampered by the erratic delivery of supplies by manufacturers many of whom, underestimating the growth in consumer demand, failed to invest timeously in additional product capacity. The Group was consequently obliged to stockpile product in its distribution centres to ensure a more or less consistent flow of merchandise to stores. These supply problems nevertheless resulted in sales losses and placed the whole of the food retail sector under pressure in terms of consumer satisfaction.
Shoprite
Despite being hardest hit of the three retail chains by the industrial action in the first quarter of the financial year, Shoprite still exceeded its budget for the year. It increased total sales by 14,4% to R18,190 billion, the number of customer transactions by 6,5% and the value per transaction by 7,2%. The growth in existing business was 8,1%. With its 297 stores, 49% of the Group’s total number of supermarkets, Shoprite remains the country’s most frequented food chain and continues to benefit substantially from the government’s largesse in social grants. At the same time support from the black middle class, which now numbers 2,6 million consumers, is also growing. Considerable potential therefore still exists for the opening of new stores in the country’s traditional black areas where developers are now keener to invest in bricks and mortar than in the past. In August 2006 Shoprite was selected South Africa’s foremost food retailer when it won the Grocery and Convenience Store category in the annual Top Brands survey conducted by Markinor in association with the Sunday Times.
Checkers
Acceptance of the repositioned Checkers by members of the higher LSM consumer segment increased, and support from its target market – the LSM 8 to 10 income groups – continued to grow during the review period. Buoyed by a high-visibility marketing campaign, turnover growth exceeded that of Shoprite. Turnover was 15,0% higher while the growth on existing business increased 10,1%. The number of customer transactions grew by 7,8% while the value per transaction increased by 6,7%. The service departments within the stores were particularly successful as the chain further increased its focus on freshness by extending its ranges of perishable and value-added products. During the reporting period both Checkers and Shoprite continued to strengthen their individual identities, further clarifying their positioning and appeal and reducing cannibalisation between brands.
Usave
The Usave concept of a limited product range forms an integral part of the Group’s footprint within and outside the borders of South Africa, being a valuable strategic tool in exploiting business opportunities. The Group’s smallest format both in store size and number of outlets, it grew turnover by 35,2% and existing business by 21,0%. Customer transactions increased by 16,9% and the value per transaction by 15,1%. It has a return on capital that consistently exceeds 30%. Central to its success is its increasing number of top-quality private labels at highly competitive prices. Focusing mainly on dry goods, this versatile, low-cost format is equally at home in urban and rural environments.
Operations outside South Africa
The Group’s non-RSA operations continued their growth throughout the year and ended the reporting period with turnover 29,4% higher. The biggest contributions came from Zambia, Namibia and Angola, while Nigeria is soon to join the ranks. Shifting the Group’s focus to the commodity-rich countries of West Africa proved to be a prescient step. It already operates in Ghana, Nigeria and Angola, and is soon to open its first supermarket in the Democratic Republic of Congo (DRC). Although higher margins are achieved than in South Africa, administrative red tape as well as inadequate infrastructure disrupts the supply chain with lead times varying from 60 to 120 days.
OK Franchise
The Franchise division also reported a year of solid growth both in turnover, which increased 14,1%, and trading profit, which was 21,1% higher. The division, which has 260 members in rural and urban areas in South Africa and some neighbouring countries, earlier established the OK trademark as an umbrella brand for now four different formats. The most recent of these, OK Value, accommodates potential franchisees with limited financial resources by setting slightly lower entry standards, thereby providing them with a platform from where they can grow into the larger formats. A new development has been the creation of a franchise liquor outlet under the trademark Enjoy, a logical extension of the Group’s franchise brands, given the strong growth in the number of its own liquor stores.
Furniture
Operating in a difficult trading environment, the Furniture division nevertheless had a satisfactory year, with the House & Home chain in particular growing way beyond the rest of the sector. It increased turnover by 14,1% while recording growth on existing business of 8,0%. Unlike food retail, which experienced rising inflation throughout the period, the furniture sector had to contend during that time with virtually no inflation, largely because of new technology becoming more affordable as its applications increase. Like its competitors, the division continued focusing on low-margin volume business to achieve its targets, balancing it with the higher returns achieved on direct imports and furniture sales. The division is expanding its non-RSA business and is already operating in Namibia, Botswana, Swaziland, Lesotho and Mozambique, with Angola and Zambia under consideration.
GROUP PROSPECTS AND OUTLOOK
Although there are indications that the economy is slowing down, it is not a matter of great concern as the primary drivers in the economy have not changed, while food retailing in any event tends to be less affected by fluctuations in the market than other areas of retail. Our confidence, however, is also based on other factors. We believe our continued investment in people, technology, infrastructure and store upgrades increasingly provide us with proper returns. In the rest of Africa our businesses are progressing well. Locally stock availability should improve while our ability to source internationally has been greatly expanded. All these factors should enable us to achieve satisfactory results in 2008.
CORPORATE GOVERNANCE
The Group is committed to the principles embodied in the Code of Corporate Practice and Conduct in the King Report 2002 (“the Code”). The Group complies with the significant requirements incorporated in the Code and in the Listing Requirements of the JSE Ltd.
DIVIDEND
It is envisaged that a final dividend of 66,0 cents (2006: 46,0 cents) per share will be declared during October 2007, making the total dividend for the year 101,0 cents (2006: 73,0 cents).
AUDITOR'S REVIEW OPINION
The condensed consolidated preliminary results for the year ended June 2007 have been reviewed by PricewaterhouseCoopers Inc. The auditors’ unqualified review opinion is available for inspection at the company’s registered office.
ACCOUNTABILITY
These condensed consolidated preliminary results have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and Schedule 4 of the South African Companies Act (Act No 61 of 1973), as amended. The accounting policies are consistent with those used in the annual financial statements for the financial year ended June 2006.
By order of the Board
C H Wiese
Chairman
J W Basson
Chief executive
29 Augustus 2007
Directorate and administration
Executive directors
JW Basson (chief executive), CG Goosen (deputy managing director), B Harisunker, AE Karp, EL Nel,
AN van Zyl, BR Weyers
Non-executive directors
CH Wiese (chairman), JJ Fouché, TRP Hlongwane, JA Louw, JF Malherbe, JG Rademeyer
Alternate directors
JAL Basson, M Bosman, PC Engelbrecht, JD Wiese
Company secretary
AN van Zyl
Registered office
Cnr William Dabs and Old Paarl Roads, Brackenfell, 7560, South Africa
PO Box 215, Brackenfell, 7561, South Africa
• Telephone: +27 (0)21 980 4000 • Facsimile: +27 (0)21 980 4050
Transfer secretaries
South Africa: Computershare Investor Services 2004 (Pty) Ltd
PO Box 61051, Marshalltown, 2107, South Africa
• Telephone: +27 (0)11 370 5000 • Facsimile: +27 (0)11 688 5238 • Website: www.computershare.com
Namibia: Transfer Secretaries (Pty) Ltd, PO Box 2401, Windhoek, Namibia
• Telephone: +264 (0)61 227 647 • Facsimile: +264 (0)61 248 531
Zambia: Lewis Nathan Advocates, PO Box 37268, Lusaka, Zambia
• Telephone: +260 (0)1 223 174 • Facsimile: +260 (0)1 229 868
Sponsors
South Africa: Nedbank Capital, PO Box 1144, Johannesburg, 2000, South Africa
• Telephone: +27 (0)11 295 8602 • Facsimile: +27 (0)11 294 8602 • Website: www.nedbank.co.za
Namibia: Old Mutual Investment Services (Namibia) (Pty) Ltd, PO Box 25549, Windhoek, Namibia
• Telephone: +264 (0)61 299 3527 • Facsimile: +264 (0)61 299 3528
Zambia: Lewis Nathan Advocates, PO Box 37268, Lusaka, Zambia
• Telephone: +260 (0)1 223 174 • Facsimile: +260 (0)1 229 868
Auditors
PricewaterhouseCoopers Incorporated
PO Box 2799, Cape Town, 8000, South Africa
• Telephone: +27 (0)21 529 2000 • Facsimile: +27 (0)21 529 3300 |
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