Aug 19, 2003
In the 12 months to 30 June 2003, Shoprite Holdings increased operating profit before exchange losses by 21.2% to R603 million (2002: R498m) on revenue that grew by 13% to R25 billion (2002:R22,1 bn). This firmly entrenches the Group’s position as the largest food retailer in Africa, with operations now comprising 641 stores in 14 countries employing 66 000 employees.
Headline earnings per share, excluding effects of exchange differences, increased by 23% to 80.1c (2002: 65.0c). The Board of directors proposed a final dividend of 16.5 cents per share for a total dividend per share of 30.5 c (2002: 25.5c), which represents a 20% increase.
During the year under review, the Rand strengthened by 27% against the US dollar, and by a similar percentage against the basket of African currencies with which the Group operates. Translating the results of foreign operations to rand, the reporting currency, resulted in an exchange loss of R133 million, compared to an exchange gain of R24 million recorded in the previous financial year.
Excluding the after tax effect of exchange differences from the operating results, the Group achieved a 21% increase in adjusted headline earnings to R407 million (2002: R336 million).
Supermarket revenue grew by 10% to R23,7 billion while Checkers same-store sales were up 15% over last year. The furniture division delivered revenue of R1 292 million, which represents an 18% growth from a year ago for OK Furniture, and an increase of some 20% for House & Home. Operations outside South Africa contributed R2,6 billion or 10% of total revenue, up from R2.3 billion in the prior year. In stable currency terms, revenue from outside South Africa grew by 32%.
Whitey Basson, Chief Executive of the Shoprite Group, commented: “We continue to benefit from our strategy to grow profitable market share. The closing of unprofitable locations, repositioning of Checkers and sales growth from Africa have all contributed to our earnings growth. Our footprint has grown across Africa and eastwards to India. We are well placed to apply our proven business models in these higher growth markets.
“Consumer demand in South Africa was better than expected seen against the backdrop of high food inflation for most of the year and increased housing, transport and electricity costs.
“These pressures impacted on the Group’s average basket size, which grew by 7.5% (2002: 8.2%) during the financial year. Combined with the 5.3% (2002: 4.9%) increase of the number of customers entering the Group’s stores, a resulting growth of 12.9% (2002: 12.8%) in revenue was achieved.
“Prices of basic commodities including wheat, maize and oil experienced deflationary pressure on the back of the strong rand in the latter half of the financial year. Shoprite management reacted quickly and reduced prices downward to alleviate pressures on the consumer, in line with its commitment to the lowest price policy. This is reflected in the gross margin, which remained stable around 15%, despite high food inflation that persisted for most of the year”, said Basson.
Through management initiatives and continued cost containment, the Group managed to increase the operating margin from 2.26% to 2.43%. The Group has additional cost reduction opportunities, which include the elimination of uneconomical operating leases. These currently amount to R83 million per annum for a total of some 94 000 square metres. Over the next three years the Group will be able to exit some 51 000 square metres of these uneconomical leases with the expected positive impact on costs.
Inventories increased by 15% to R2.6 billion. As a result, stock turn remained reasonably constant at 10.3. This, however, falls short of the Group’s stated medium-term objective of a 12 times annual stock turn. During the year the Group introduced electronic point-of-sale scanning and fully integrated the replenishment system directly with suppliers. These measures, which introduce more disciplined ordering, will contribute to a reduction of stockholding.
Net finance costs were mainly on the back of increased spending on real estate to facilitate our expansion of stores in African markets. Capital expenditure amounting to R562 million was spent on the continuing refurbishment and opening of stores and distribution centres. R134 million of that was spent on capital expenditure outside of South Africa.
Exceptional items comprise mainly of amortisation of negative goodwill amounting to R153 million (2002: R69 million). The negative goodwill has been amortised in line with the utilisation of deferred tax assets relating to the assessed tax losses. This amortisation should be completed by next year.
Basson commented on the future of the company saying that the Group aims for revenue growth in South Africa in line with GDP growth in real terms, currently at some 11% in South Africa. For stores outside South Africa, Shoprite’s objective is to grow revenue by utilising all opportunities that meet the Group’s required rate of return on capital employed, in order to realise the Group’s ambition of earning 50% of Group earnings from outside South Africa in the medium term.
A return of 33% on capital employed across the Group was achieved against a stated target of 30%. New stores are expected to meet this return after two years of operation.
Basson added: “The food retail market in South Africa is competitively serviced. The Group is therefore cautious to expand its business in this market and will not buy market share at the cost of earnings, as reflected in the growth of operating margin. Shoprite’s objective is to maintain its market share in South Africa, and constantly adapt to changing consumer preferences.
“The increase in demand for convenience stores provides an opportunity for growth in South Africa. The continuing consolidation of the Group’s franchise operations under the OK banner will improve the Group’s share of this market.
“Further opportunities not covered by any of the Group’s current store formats in the bottom-end of the market are being pursued through Shoprite Usave, which has proven to be a robust and disciplined format for replication in Africa.
“The Group believes Africa is a viable growth opportunity, because consumer preferences are similar to those in the South African market, Shoprite’s proven South African business models can be easily replicated, operations are within easy reach, there is no formal opposition while there is substantial GDP creation in Africa outside of South Africa, and consumers appreciate the Group’s first-world offering.
“The Group’s objective for Africa is to gain a foothold in the most lucrative markets as soon as possible. To date, operations have been established in Zambia, Uganda, Tanzania, Mozambique, Malawi, Namibia, Botswana, Lesotho, Swaziland, Mauritius, Madagascar, Egypt and Zimbabwe. During the next year a further 32 stores will be opened. In addition to opening new stores in existing territories, 4 stores are due to open in Angola, 5 stores in Ghana and a hyper-store in India.
“Expansion to India presents a valuable opportunity to export the Group’s proven success in meeting the needs of Indian customers. The market is particularly under-serviced in the formal, low-cost, first-world offering. Shoprite is entering the market with a small initial investment, as landlords exist and all international suppliers are already operating in the country.
“The Group is committed to the continued growth of the furniture business. Initiatives to unlock fair value from the business, which could include a listing, may be considered in future,” Basson concluded.