Investor Centre » Interim Reporting

SHOPRITE HOLDINGS: INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008

SHOPRITE HOLDINGS LIMITED
(Reg. No. 1936/007721/06)
(ISIN: ZAE 000012084)
(JSE Share code: SHP)
(NSX Share code: SRH)
(LuSE Share code: SHOPRITE)
(“the Group”)

 Key information

• Trading profit was up 38,2% to R1,409 billion.
• Turnover increased 27,3% - from R23,260 billion to R29,604 billion.
• Non-RSA supermarkets achieved 54,3% sales growth.
• Diluted headline earnings per share rose 43,3% to 184,0 cents.
• Dividend per share declared 70,0 cents (2008: 49,0c) an increase of 42.9%.

Whitey Basson, chief executive, commented:

Despite difficult trading conditions brought about by the global economic slowdown, all the divisions of Shoprite Holdings posted first-rate results for the six months to end December 2008, comfortably exceeding food inflation levels. This was achieved notwithstanding the sacrifice of approximately R170 million to support consumers trying to cope with higher food inflation. Locally the low-price positioning of all three of its supermarket chains continued to attract growing numbers of increasingly price-sensitive consumers across the income spectrum. To assist struggling shoppers, savings brought about by falling fuel prices were rapidly passed on to consumers. Continued support led to an increase of 1,6% in local market share to 30,4% on a like-for-like basis. The Group’s non-RSA supermarket operations again produced pleasing results growing turnover by more than 54% in rand terms on the back of a weaker local currency. By further sacrificing gross margin to build turnover on the one hand and managing the cost base efficiently on the other, a trading margin of 4,8% was achieved in the business as a whole.

17 February 2009

Enquiries:

Shoprite Holdings Limited
Whitey Basson, chief executive
Carel Goosen, deputy managing director
Tel: 021 980 4000

De Kock Communications
Ben de Kock
Tel: 021 422 2690 
Cell: 076 390 7725

OPERATING ENVIRONMENT
Factors that dominated the market in the first six months of 2008 – high interest rates, soaring financing and debt-servicing costs as well as rampant food inflation - became even more pronounced in the last six months of the year while the gloom of the global financial crisis started to cast a larger shadow over the local economy. The disposable income of many consumers was curtailed, especially at the higher end of the market with its greater exposure to the effects of the present economic slump. At the same time job insecurity became a reality. A certain resilience nevertheless remained in especially the lower end of the market where it was sustained by the government’s wide-ranging support for low-income earners and its investment in infrastructure. This resilience was clearly in evidence in the December sales of the Group’s various businesses.

COMMENTS ON THE RESULTS

Income statement

Total turnover
Total turnover increased by 27,3% from R23,260 billion to R29,604 billion, due to the excellent performance from all the divisions. The growth considerably exceeded internal food inflation, which averaged 16,9% for the review period compared to 9,2% in the corresponding six months.

Gross profit
To compete successfully in the vigorously contested South African market, the Group’s supermarket brands sacrificed gross margin of approximately R170 million for turnover growth. As a result, the gross margin reduced from 20,0% to 19,5%.

Expenses
The cost base was managed well. In November a historic agreement was reached with the South African Commercial Catering and Allied Workers Union (Saccawu) to make a once-off additional payment over and above employees’ normal Christmas bonus to address prevailing economic circumstances.

Trading margin
The trading margin of 4,8% was a factor of the strong growth in turnover against a much slower increase in expenditure and subsequent growth in trading profit of 38.2%.

Interest received and finance costs
The increase of 24,5% in net interest received resulted mainly from the stronger cash flow generated by higher turnover.

Exchange rate gains
The exchange rate gains of R26,3 million (2008: R7,1 million) was purely a factor of the relative weaker rand vis à vis the currencies of the main countries in which the Group trades outside South Africa and was not a reflection of operational activities. 

Dividend declared
The board declared an interim dividend of 70,0 cents per ordinary share (2008: 49,0 cents) payable to shareholders on Monday, 16 March 2009. 

Balance sheet

Property, plant and equipment
The increase of 26,3% to R5,199 billion was mainly due to the purchase of land and buildings in excess of R450 million in the past 12 months for future store development, as well as refurbishment and new stores opened during the period.

Inventories
The increase of 39,5% in inventory to R6,489 billion exceeded the growth in turnover. The main reasons were the following:

• A net of 55 supermarkets and 26 furniture stores were opened in the past 12 months and had to be provisioned. 
• Supplier deliveries remained erratic forcing the Group to continue stockpiling certain products to prevent out-of-stock situations and to curtail rampant inflation, thus enabling the Group to maintain an internal rate of inflation lower than the official rate of inflation. 
• The decline in the world economy and the resultant increase of supplier capacities led to the early delivery of orders by international suppliers, with some deliveries scheduled for January already arriving in December, benefiting low price stability due to the weakening of the rand subsequent to placing orders.

Cash and cash equivalents
A favourable balance sheet closing date produced a temporary surge in net cash and cash equivalents from R 2,619 billion at December 2007 to R 4,066 billion and should be read together with the increase in trade creditors.

OPERATIONAL REVIEW

Turnover increased by 27,3% to R29,604 billion while trading profit was boosted by 38,2% to R1,409 billion from R1,020 billion in the corresponding period. This was achieved against a background of tougher trading conditions, lower consumer confidence and declining disposable income as the Group continued to benefit from its positioning as the country’s leading value-provider in food retailing; its promotion of a one-stop shopping experience, extended consumer services and its ongoing investments in infrastructure, IT and supply chain management. Excellent results were achieved by all the divisions in the Group and by almost all departments within each division. The major contributor to turnover and trading profit was obviously its core business of food retailing, but the franchise division as well as the furniture division, the latter despite operating in a highly aggressive discount environment, produced better results than in the previous reporting period. Within South Africa support from an ever-increasing consumer spectrum continued to grow while outside the country’s borders the strong spurt in sales was supported by cheaper exports from South Africa due to the weakening of the rand. 

RSA supermarkets
The Group’s supermarket operation in South Africa, encompassing the Shoprite, Usave and Checkers brands forms the core of the business and represented 77,6% of total turnover. In the six months the division grew ahead of the market by increasing sales by 24,5% to R22,963 billion. This should be seen against the background of internal food inflation that escalated to 16,9% from 9,2% in the corresponding six months. At the same time the prices of certain staples dropped substantially during the current period thereby assisting lower-income consumers. To strengthen its positioning as the food retailer consistently offering the best value, the Group continued its policy of reducing gross margin to bring down prices while also using savings achieved in other areas - such as lower fuel costs – to further soften prices. This policy attracted increasing numbers of price-conscious consumers so that the total number of customer transactions in the three chains increased by 8,5% (or 314 million transactions) while the value per transaction grew 15,2% or slightly below internal inflation. The Group benefited from higher sales against lower cost increases, due to the majority of costs being fixed. Market share increased by 1,6% to 29,8% (30,4% on a like-for-like basis), the highest growth achieved by any of the South African food retailers. Shrinkage was kept well under control in all three chains. Turnover in non-foods did not grow at the same pace as foods due to more consumer spend directed to food.

Shoprite
Shoprite, with its 312 local stores accounting for 59,2% of the sales generated by the Group’s supermarket operations in South Africa, increased turnover by 23,3% to R13,600 billion, having opened 11 new stores during the review period. On a like-for-like basis turnover advanced by 20,8%. Positive growth was achieved in all departments of all divisions. Shoprite’s low-price positioning continued to appeal to shoppers in ever-increasing numbers across the income spectrum enabling it to increase its share of the local food market by 0,7% to 16,5% (17,2% on a like-for-like basis).The number of customer transactions increased by 6,2% and the value per transaction by 16,5%. 

Checkers
In the review period the benefits of its more up-market repositioning and its growing appeal to consumers in the LSM 8 – 10 categories were amply demonstrated as turnover jumped 23,6%, its strongest growth since its repositioning and matching for the first time the growth rate of the Group’s core business, Shoprite. Independent market surveys show Checkers was, in fact, the country’s fastest-growing chain during the 6 months under review. It performed particularly well in the last three months of 2008 having added six new stores to bring its total to 149. Turnover reached R8,565 billion as a result of an increase of 9,9% in the number of customer transactions and a growth of 12,8% in the value per transaction. This brought the chain’s market share to 7,3% from 6,7%.

Usave
This small, primarily hard-grocery chain continued to grow apace both in its footprint and in turnover. Assisted by a net gain of 24 new stores bringing the total to 115, Usave raised turnover by 63,5% albeit off a low base compared to the other two chains. Customer loyalty was reflected in same-store growth of 32,1%. During the six months the number of customer transactions grew by 31,0% and transaction value by 24,8%. In line with Shoprite and Checkers, Usave also sacrificed gross margin to boost turnover. It also increasingly switched to private label products with their higher margins, but lower prices than comparable branded items. 

Supermarkets outside South Africa
The Group’s non-RSA supermarkets again performed satisfactorily and continued to grow despite intense difficulties and long lead times. At the end of the review period it comprised 101 supermarkets trading in 16 countries outside South Africa, predominantly under the Shoprite and Usave banners. Supported by a weaker rand, this business increased total turnover by 54,3% in rand terms and by 50,3% on a like-for-like basis. Lower export prices from South Africa provided the Group with a major price advantage in certain product categories. The non-RSA supermarkets represented 14,1% of the Group’s supermarket sales for the period under review. As in the past the commodity-rich countries on the west coast of Africa delivered the best performance. The Group intends continuing its growth strategy in these countries and negotiations are at an advanced stage for the opening of a number of new outlets.

OK Franchise
In line with the rest of the Group’s food business, the franchise division performed well, increasing turnover by 28,7% as members, attracted by very competitive prices, rebates and payment conditions, increased the volume of business placed through OK Franchise. Trading profit climbed steeply as the gap widened between turnover growth and overhead costs. During the reporting period 33 new members joined, to bring the total number of franchisees to 281. The division, which over the past two years has greatly stabilised its franchise holder base, exercises rigorous credit control and bad debt provisions remained well within acceptable levels.

Furniture
The turmoil on international markets, a weaker rand, soaring food inflation and the generally high cost of living placed great strain on the sector for durable and semi-durable goods as consumers struggled to make ends meet. Trading conditions became increasingly difficult as competitors vied to build turnover through increased unit sales, even if it meant doing so at extremely low margins. In these conditions sales in House & Home, the furniture division’s more upmarket chain, were initially very muted while OK Furniture, which caters to the middle and lower end of the spectrum, managed to maintain sales volumes comparable to those before the introduction of the National Credit Act in June 2007. However, in the last two months of the reporting period there was a spurt in sales in both the chains and the division ended the period with sales 13,3% higher than in the corresponding period. Trading profit increased by 5,9%. A positive trend emerging is the steady increase in credit sales and the consequent rise in finance income. Due to the division’s dedicated collection policy bad debts remained well within acceptable limits.

GROUP PROSPECTS AND OUTLOOK
Despite sales continuing to grow in January at the same rate as in the reporting period, the board does not expect this to be maintained for the remaining five months of the financial year. As a result of the global financial meltdown and a slowdown in world trade, reduced exports will lead to job losses which will impact negatively on business. Although retail markets in Africa to date have given little evidence of being troubled by these developments it is bound to happen as the crisis deepens worldwide. As a board we therefore don’t believe the present growth rate is sustainable although we do believe that because of its value positioning the Group is better placed than most to weather the storm and to achieve satisfactory results for the remainder of the financial year.

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 Listings Requirements of the JSE Ltd.

DIVIDEND No. 120
The board has declared an interim dividend of 70,0 cents (2008: 49,0 cents) per ordinary share, payable to shareholders on Monday, 16 March 2009. The last day to trade cum dividend will be Friday, 6 March 2009. As from Monday, 9 March 2009, all trading of Shoprite Holdings Ltd shares will take place ex dividend. The record date is Friday, 13 March 2009. Share certificates may not be dematerialised or rematerialised between Monday, 9 March 2009 and Friday, 13 March 2009, both days inclusive.

ACCOUNTABILITY
These condensed consolidated interim results have been prepared in accordance with International Financial Reporting Standards (“IFRS”), IAS 34: Interim Reporting, 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 period ended June 2008.

By order of the Board

17 February 2009

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), TRP Hlongwane, JA Louw, JF Malherbe, JG Rademeyer

Alternate directors
JAL Basson, M Bosman, PC Engelbrecht, JD Wiese

Company secretary
PG du Preez

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.
Website: www.shopriteholdings.co.za

Transfer secretaries

South Africa: Computershare Investor Services (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 Group (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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