Tops at Spar and Build it buckle under pandemic pressure

Tops at Spar and Build it buckle under pandemic pressure

The Spar Group has taken a knock in its business operations as a result of the Covid-19-induced lockdown in South Africa.

During its interim results presentation on Thursday, the giant retailer said its heavily-impacted businesses in southern Africa are the Build it and Tops at Spar retail chains, which were required to close in accordance with the lockdown measures.

It says that for the prior financial year, these combined businesses represented 21% of southern Africa turnover.

“The pandemic has created a real risk to retail sales, and consequently to our wholesale business,” said Spar CEO Graham O’Connor.

“This situation will be further aggravated by [the] expected economic slowdown, possible increases in unemployment and additional pressure on already financially-constrained consumers.”

Spar CEO Graham O’Connor. Image: Moneyweb

With a high level of uncertainty expected to remain across all its markets, trading conditions will continue to be challenging – “food prices are expected to rise, and consumer spending will experience unprecedented levels of pressure,” it says.

At this stage, the group cannot estimate the impact of the pandemic, but will continue to evaluate developments on an ongoing basis.

The numbers

Group turnover for the six months ended March 2020 increased by 10.1% to R59.7 billion, while operating profit was down 3.4%.

It says this is as a result of the group’s Polish business (a controlling stake in the Piotr i Pawel group was completed in October last year).

The group saw a 13.4% decline in its normalised diluted headline earnings per share, while its normalised headline earnings increased by 8.2% (excluding Poland).

It took a “conservative approach” and cut its interim dividend 29.6% to 200c.

It will consider the annual dividend at year-end, when there is more clarity on the full economic and business impact of the pandemic.

Spar Southern Africa contributed growth in wholesale turnover of 7.8%, despite a challenging start to the reporting period and against internally measured food inflation of 4.1%.

Its Tops liquor brand reported weak wholesale turnover growth of 3.9%. This was mainly impacted by the move of certain products to direct sale and a loss of retail loyalty.

“Build it delivered a resilient performance in a weak sector, with wholesale turnover down 2.4%,” the group says.

Spar Southern Africa saw its network grow to 2 402 stores, with 53 net new stores opened across all formats. The group completed 163 store upgrades.

Private label ‘boost’

At a retail level, turnover of Spar stores increased by 9.6% to R46.4 billion (2019: R42.3 billion) and recorded market-leading like-for-like growth of 7.9%.

Its combined food and liquor retail sales increased by 9.7%. Wholesale turnover for food grew 9.7% to R31.6 billion.

“This performance has been boosted by strong growth in house brands,” it reports. Spar private label grew by 11.8% year on year, representing 15.9% of core turnover. The turnover from total house brands increased by 9.9% year on year to R7.5 billion, representing 23.6% of core Spar turnover.

Its house brands are home meal-replacement offerings such as Chikka chicken, while the private label products are more representative of products competing with proprietary brands on the shelf.

Poland restructuring

36One Asset Management retail analyst Evan Walker suspects that the Polish loss wasn’t operational. Piotr i Pawel has been under business rescue, but Poland’s lockdown measures suspended all related court activity, preventing the matter from being settled. It is uncertain when the proceedings will resume.

Read: Spar sees Polish business breaking even in 24 months

“This has delayed the resumption of normal trading operations, with adverse effects on both retail and wholesale performances reported during and after the reporting date,” according to the group.

“Retail customers in [Poland] have also been negatively impacted by the lockdown measures and repayment terms have been made with accounts receivable, where required.”

Test is yet to come

Walker says the group has made a wise decision in taking the conservative approach to dividends as the “uncertainty is too big to stress the balance sheet at all”.

“These were commendable results, I must say – a lot better than Pick n Pay’s,” he says. “The group shouldn’t be negatively impacted by the lockdown, apart from its Tops operations, where the stores had to close due to the lockdown.

“The true test will really come now [next financial year], as consumers are cash-strapped and feeling the constraint,” Walker says.

Listen to Ryk van Niekerk’s interview with Spar CEO Graham O’Connor on the impact of the lockdown, reopening preparations and the dividend:

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