Not partying like it’s 1999: Shoprite plunges most this century

JOHANNESBURG — Retailer Shoprite has gone from being among one of the darlings of the JSE to becoming a scarecrow for investors. The company’s share price has plunged the most on the JSE since 1999 this week amid a profit warning and internal IT woes. The retailer’s earnings woes are further compounded by a weak economy and rising competition. We’ve seen what competition has done to the likes of Edcon. As a result, Shoprite will have to work extremely hard to ultimately avoid experiencing the same fate. – Gareth van Zyl

By John Bowker

(Bloomberg) – Shoprite Holdings Ltd. shares slumped the most since 1999 after Africa’s biggest grocer said first-half earnings dropped as much as 26%, with South African food deflation and IT troubles compounding weakness in the rest of the continent.

Headline earnings per share declined between 16-26% to as little as R3.89, the Cape Town-based supermarket operator said in a statement after the market closed on Tuesday.

Shoprite

Key insights

  • Shoprite has more than 2,500 stores throughout Africa, yet a considerable majority are in South Africa. That exposes the company to the depressed consumer environment in the continent’s most industrialised economy, which particularly affects its core lower-income customers.
  • Alongside food-price deflation and rising costs in essentials such as electricity and security, Shoprite struggled with the introduction of a new IT system and some industrial action.
  • There’s little sign of any economic improvement either, though the company insists it can rely on customer support for its brands.
  • In countries elsewhere in Africa, Shoprite’s problems aren’t new. A massive devaluation in the Angolan currency (and, to a lesser extent, in Zambia and Nigeria) has hurt conversion to the rand and driven up import costs. Meanwhile, rents in many African countries are linked to the US dollar.

Market reaction

The shares fell as much as 17%, the most since July 1999, and traded 12% lower at R157.37 as of 9:12am in Johannesburg. That extended a January decline to 17%, and the stock is down 34 percent over the past 12 months, compared with a 10 percent retreat on the FTSE/JSE Africa Food & Drug Retailers Index.

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“Shoprite’s high South African margin has been driven by a formula of low prices in ever-improving stores,” said Charles Allen, an analyst at Bloomberg Intelligence.

Yet “availability issues, caused by an IT upgrade and strike, have hurt revenue” and “competition has improved, meaning that the company will have to work harder to regain momentum.”

“Profitability has been affected by South African deflation and consumers under extreme pressure, as well as inflexible costs, many of which are fixed in dollars across other African countries,” said Alec Abraham, an analyst at Sasfin Securities in Johannesburg.