1. Financial Performance Report
Publication date:
March 2019
Next publication:
November 2019
Financial Performance Report

2. Economic Indicators for Shoprite HY2019 period (July to December 2018)
Trading Context HY2019
The six months to December 2018 saw retailers facing continued tough market conditions and increasing competition. The South African economy remained constrained, despite stepping out of a technical recession, GDP growth averaged at +2.0%. Consumer confidence is wearing down after the unprecedented jump last year (CCI: 7), with disposable income under pressure and employment opportunities dwindling. Growth in total retail trade sales for the six months at +1.2%, thanks in part to the recovery in some durables and the resilience in health and beauty. Food retail sales growth declined -1.9% for the six months (2018: -1.7%). Rand volatility saw the currency fluctuate in response to domestic and international changes. Inflation consistently within the target range however the Reserve Bank decided to act pre-emptively and increase the interest rate as the exchange rate and international fuel price expectations suggested inflation could increase despite food inflation remaining low at 3.4% on average for the six months (LY: 5.6%) Amongst these challenges in the industry, South Africa’s biggest retailer faced an onslaught of issues causing a weak half: the disruption caused by SAP ERP re-platforming; this on the back of industrial action at the Group’s largest DC, saw supply chain issues amounting to R1bn in missed sales; a massive devaluation in the Angolan currency, and the longest period of stagnant internal inflation in the last 10 years at 18 months.
Economic Indicators for Shoprite HY2019 period (July to December 2018)
GDP Growth
2.0%
CPI
5.0%
Fuel Price
-5% decline since July 18
CPI Food and Non-Alc Bev
3.4%
R/$ Exchange Rate
7% weaker since July 2018
RMB/BER Consumer Confidence Index (CCI) 7
Interest Rate
Increased from 10% to 10.25%
Growth in Retail Trade Sales
1.2%
% of Household Debt as % of disposable income
71% For Q3/2018
Growth in Food and Beverage Retail Sales
-1.9%
SOURCE: Ti Economic Indicators Report, StatsSA, BER

3. KPI Metric FY2017 53:52 weeks FY2018 HY2019
Turnover Performance
Group Turnover
Comp Turnover Growth
+8.4% to R141bn (10.6%)*
+5.8%
+3.1% to R145.3bn
-0.1%
+0.2% to R75.8bn
-2.7%
Profitability Performance
Gross Profit
Gross Profit Margin
Operating Profit
Operating Profit Margin
+10.3% to R33.8bn
23.58% to 23.99%
+6.9% to R7.7bn
5.56% to 5.48%
+2.7% to R34.7bn
23.9%
-2.7% to R7.5bn
5.17%
-2.8% to R17.5bn
23.1% (HY18: 23.8%)
-16.9% to R3.4bn
4.5% (HY18: 5.4%)
Operational Performance
Internal Inflation
Inventory levels
CAPEX
Basic HEPS
+5.9%
+18.2% to R17.8bn
+8.7% to R5.17bn
+13.1% to cents
+0.5%
+0.9% to R18.0bn
+3.3% to R5.34bn
-5.2% to cents
+0.4% (HY18: 0.4%)
-0.3% to R21.7bn
-4.7% to R2.8bn
-24.1% to cents
The positives:
Positive comparable retail turnover growth in SPAR Southern Africa
Diversified revenue stream saw 30.6% of turnover now being generated in foreign currency due to the Group acquiring a majority stake in SPAR Switzerland and SPAR Ireland
Gross profit growth ahead of sales growth for the Group
Increasing gross profit margin and Operating profit margin
Consistent increase in the contribution of stock going through the DCs
The Negatives:
Tough and competitive trading environment in South Africa
Low internal inflation for SPAR Southern Africa with deflation in some commodity categories thereby impacting on sales, especially SPAR private label sale
Sales impacted by Listeriosis outbreak
Economic uncertainty due to Brexit
Deflationary pressure in Ireland and Switzerland
Southern Africa’s operating expenses growth ahead of sales growth at +11% due to increased marketing and selling costs and the inclusion of S Buy
SOURCE: Shoprite Holdings
“We are not put off by the challenges of this country or the rest of the continent […] We continue to invest in the downturns and the upswings.” Christo Wiese Chairman Shoprite Holdings
- Graham O’ Connor, SPAR Group CEO Jun 2018

4. Comparable Turnover Growth
Group Turnover Performance
Group turnover increased +0.2% to R75.9bn (HY2018: +6.2%) during this tough, transformational period marred with multiple overlapping factors disrupting trade
Comparable growth -2.7% Volume growth +0.2% with billion products sold and customer growth +1.7%, serving million customers
Factors impacting sales
Over R1bn in lost sales due to out-of-stocks caused by SAP ERP system roll out and compounded by industrial action in Gauteng DC where the third-party work force went on strike
Record sales for ‘Black Friday’ biggest day ever with over R1bn in one day, satisfactory growth on last year
Non-SA’s performance was severely impacted by the significant currency devaluations
Consistently low internal inflation over the last 18 months, HY2019: +0.4%, new low
Other factors include robberies, revamps, listeriosis outbreak, sugar tax and VAT increase
Private label sales are reportedly growing at double the rate of all brands, with +767 new products, participation +0.6% points to 16.4% in HY2019
Online channels reportedly performing well – ‘Click n Collect’ at 257 Checkers, delivery with Uber eats and Mr D
Turnover by Operating Segment (R’m) HY2019
Turnover (R’m)
Turnover % Growth
Comparable Turnover Growth
Percentage of Group
Group
75 867
0.2%
-2.7%
SA Supermarkets
56 138
2.6%
-0.5%
72.3%
Non-SA Supermarkets
11 122
-13.3%
-16.5%
16.9%
Furniture
3 420
4.3%
4.2%
Other Operating Segments
5 187
6.5%
3.9%
6.4%
SOURCE: Shoprite Holdings,
NOTE: The hyperinflation in Angola is a result of the move on the exchange rate at the end of the year needing to be applied back to the full period under review

5. SA Supermarket Performance
Turnover +2.6% to R56.1bn for HY2019 (HY2018: +5.7%), accounting for 74% of total sales. Transaction growth +2.0% and volume growth %
Comparable turnover declined -0.5%. Core categories faced zero inflation or deflation, total internal inflation +0.4% for HY2019
Sales impacted by constrained consumer and stock-outs caused by the Gauteng DC strike and the change over to SAP ERP
Shoprite
Turnover +1.2% growth in a zero inflation period where targeted consumers are over-indexed in commodities and price-sensitive, basic food prices continued to be subsidised to assist the most vulnerable
Sales were hard-hit by out-of-stock
Checkers
Turnover +4.3% (Excluding Hyper), Hyper sales were impacted by refurbs but should recover in H2
Market share gains and sales growth are attributed to gains in the top-end affluent consumer segment with continuous innovation and improvement in fresh, health and convenience food ranges
20 stores have been converted to a new look FreshX concept out of a target of 80 stores
Usave
Turnover -1.0% impacted by DC issues despite growth on the Usave private label
The small format has a clear strategy to offer the lowest possible price on a restricted range, deflation is a challenge and includes 9 new stores in underserved areas with a new container format coming out soon
LiquorShop
Significant market share gains reported with +20.1% growth, this continued strong performance includes the opening of 27 net new stores, meeting the expansion target of a new store per week for the six months
SOURCE: Shoprite Holdings

6. Non-SA Supermarket Performance
Operating out of 14 Non-SA countries in Africa and the Indian Ocean islands and contributing 14.7% to Group sales
Turnover growth -13.3% to R11.1bn (HY2018: +0.4%)
Comparable store turnover growth –16.5% attributed to currency fluctuations in major countries of operation
Constant currency growth at +0.05% (HY2018: +1.9%)
Internal inflation increased to +2.8% for HY2019
Angola currency devaluation of 85.1% against the US$ since Jan 2018 compounding the effect of the economic recession on consumer spending
Nigeria also affected by exchange rates, positive constant currency growth +8.4% bolstered by the new store opened in the past year, the improved stock availability and the addition of a fresh through their DC
Kenya joined the portfolio opening up in East Africa’s largest economy
The Group remains positive about the viability of their investment in Non-SA, with generally positive long-term prospects, rapid population growth and market formalisation and believe their footprint and strategic expansion plan, uniquely position them on the continent
Non-SA Turnover Growth
Number of Supermarkets
(as per Website)
Growth in rands (%)
Constant Currency Growth (%)
Total Supermarkets Non-SA
238
-13.3%
+0.05%
Angola 28
-45.0%
-9.9%
Nigeria 25
-1.4%
8.4%
Zambia 34
0.7%
11.0%
Namibia 55
1.1%
SOURCE: Shoprite Holdings

7. Furniture Group Performance
Turnover for HY % to R3.4bn
Comparable store turnover +4.2%
Solid result considering that credit sales participation dropped drastically to only 12.7% of total sales (HY2018: %). ‘Black Friday’ sales exceeded expectation boosting next half’s sales
Other Operating Segments Performance
Turnover +6.5% to R5.2bn
OK Franchise Division
Turnover +8.5% with market share gains
Conversion of franchise stores to the OK brand to be completed this year
11 new OK Express forecourt stores opened in H1, total 35
Increasing use of DC’s
Better sales with wider range of fresh products and more frequent deliveries
Strong uptake of private label products and general merchandise ranges
MediRite has 163 pharmacies
Including 15 in Angola, 1 in Mozambique and 3 in Swaziland
SOURCE: Shoprite Holdings

8. Group Profit Performance
Gross Profit
Group gross profit declined -2.8% to R17.5bn for HY2019 (HY2018: R18.0bn) with an estimate of over R250m lost in profit due to supply chain disruptions
Gross profit margin is reported at 23.11% for HY (HY2018: 23.8%)
Change in margin attributed to:
SA Supermarket’s margin under pressure to support prices and deliver low price promise
R95.2m adjustment due to change to MAC impacted margin
Unprecedented 85.1% currency devaluation in Angola
Supermarket Non-SA account for a margin declined -0.8 percentage points, especially in Angola where the margin was under pressure as the cost inflation couldn’t be passed to consumers (reported R10m loss in GP)
DC costs and IFRS financial adjustments account for a decline of -0.4 percentage points as distribution fee income was lost when suppliers had to deliver direct during industrial action at the DC as well as additional expenses incurred
The rest of the business maintained the margin and offset the decline by +0.5 percentage points
Components to gross margin include:
Profit on selling price vs MAC
Supplier
DC costs – including the fuel cost
Waste and shrink
SOURCE: Shoprite Holdings

9. Group Profit Performance cont.
Trading Profit
Trading profit declined -19.0% to R3.3bn including the effect of hyperinflation of R376m
Trading margin at 4.4% for HY2019 (HY2018: 5.4%) on the back of the declining gross margin, but remains competitive relative to the relevant markets
H2 margin target is around 5%, the Group warns that it will not be enough to make back H1’s decline
Trading Profit Margin and Growth
Trading Profit (R’m)
Trading Profit Margin
% Growth
Comments
HY2019
FY2018
Group
3 323
5.51%
4.38%
-19.0%
SA Supermarkets
2 839
6.08%
5.06%
-15.1%
DC issues and IFRS adjustments
Non-SA Supermarkets
-62
2.81%
-0.56%
-111.2%
Unprecedented 85.1% currency devaluation in Angola
Furniture
104
4.29%
3.04%
-5.5%
Could see a recovery in H2 as suppliers come into stock sold out from ‘Black Friday’
Other Operating Segments 66
2.64%
1.27%
-33.3%
Impacted by Pharmacy in Angola and the currency devaluation
SOURCE: Shoprite Holdings

10. Group Profit Performance cont.
Operating Profit
Operating profit declined -16.9% in HY2019 to R3.4bn (HY2018: R4.1bn), this is with expenses growth +5.6% and other operating income +9.4%
Operating margin declined to 4.46% in HY2019 (HY2018: 5.38%), in line with the shift in trading margin and the lower sales growth
SOURCE: Shoprite Holdings

11. Group Profit Performance cont.
Operating Profit cont.
Other Operating Income growth +9.4% to R1.6bn in HY2019
The Group reported an exchange rate loss of –R3.4m for HY2018 (HY2018: gain +R4.0m) showing their hedging strategy is working for Non-SA
Includes the 85.1% devaluation of the Angolan currency vs US$ since Jan
Other Operating Income Growth
HY2019
Contr. to Income
% Growth
Total
1 565
9.4%
Finance income
140
8.9%
-4.1%
Net premiums
137
8.8%
-22.6%
Operating lease income
251
16.0%
8.2%
Commissions
447
28.6%
3.7%
Franchise fees 45
2.9%
9.8%
Investment income
244
15.6%
52.5%
Sundry income
301
19.2%
23.4%
Net premiums declined: Drop in credit participation in furniture to 12.7% (HY18: 14.5%)
Investment income increased: Angolan investment
Operating Expenses growth at +5.6% to R16.2bn in HY2019
Operating Expenses Growth
HY2019
% Growth
Comment
Total
5.6%
Depreciation
1 300
9.6%
5.5% excl Hyperinflation
Hyperinflation adjustment R49m
New Stores
Ongoing refurbishments
Legacy systems fully depreciated as SAP ERP replaced them (est. R41m)
Operating leases
2 300
7.4%
Employee benefits
5 900
6.2%
1,758 additional jobs in six months
Yes programme implemented
New min wage effective Jan 19 (est. additional R40m cost)
Other
6 700
3.8%
Electricity and water +6.1%
Security costs remain high
SOURCE: Shoprite Holdings

12. CAPEX
CAPEX declined -4.7% to R2.8bn in HY (HY2018: R2.9bn) with R1.9bn on expanding operations and R900m on maintaining operations
Split of expenditure:
24% going to store refurbishments, up +23% on LY, this includes the Hypers
16% of CAPEX was on Other replacements – including vehicles and general asset replacements, up +49% on last year
DC CAPEX -21% as LY included the Western Cape DC and H2 will include for Fresh in WC
IT CAPEX includes loyalty programme development as well as value-added services
‘Future-fit’ formats as space growth in SA slows and new formats give opportunity for better returns on capital
CAPEX and cash flow is a focus going forward the Group is waiting to move some Angolan bonds from US$ to rands to change their net finance cost weighting
CAPEX (R’m) and CAPEX % Change
HY2018
HY2019
Growth
Share
Group CAPEX Levels
2 934
2 795
-4.7%
Land and Buildings
424
304
-28.3%
10.9%
Distribution Centers
658
522
-20.7%
18.7%
New Stores
454
325
-28.4%
11.6%
Store Refurbishments
535
656
22.6%
23.5%
Information Technology
564
543
-3.7%
19.4%
Other replacements
299
445
48.8%
15.9%
CAPEX a % of Turnover
3.9%
3.7%
SOURCE: Shoprite Holdings

13. Inventory Levels
Inventories -0.3% to R21.7bn in HY2019 (HY2018: R21.8bn)
This includes adjustments made in the switch to MAC (moving average cost), these now complete
Stock holding has taken a backseat to in-stocks as the Group recovers from out-of-stocks and focuses on serving the customer
Non-SA currency movement resulted in –R900m less stock as well as improved stock management
Growth in inventory levels is attributed to a net 86 new corporate stores opened in the 12 months to Dec as well as Increased capacity at DC (Cilmor, WC)
Shoprite is the biggest distributor on the continent
It is anticipated that there will be ongoing efficiency gains through the extensive and sophisticated supply chain as it matures and consolidates, once the short- term on-shelf availability issues are resolved
This has been supported by investment in information technology around inventory management systems and distribution centre development plans
Group Inventory Levels
HY2018
HY2019
Growth
Share
21 765
21 700
-0.3%
South African supermarkets
14 800
15 600
5.4%
71.9%
Non-SA supermarkets
4 600
3 700
-19.6%
17.1%
Group Furniture
1 600
1 800
12.5%
8.3%
Other Operating Segments
800
500
-37.5%
2.3%
Hyperinflation
100
0.5%
Inventories a % of Turnover
28.8%
28.6%
Stock turn
5.8
5.9
SOURCE: Shoprite Holdings

14. Internal Inflation and CPI
Internal food inflation for the Group is reported at +0.4% for HY2019, unchanged from HY2018
This marks 18 months of stagnant inflation, the longest period of stagnation in a 10 years
This is the lowest reported internal food inflation in seven years and is substantially below the average Food CPI of 3.4% for the period
Shoprite’s SA Supermarkets internal inflation of +0.4%
For September 11,607 items in deflation and December 10,719 products sold with deflation in selling price
Greater exposure due to mix weighted towards commodity/basic which are price-supported by the Group, this dampening growth results in Shoprite and Usave which have a dominant share in the products that are in deflation
Shoprite retail stores internal inflation at zero for HY2019
Non-SA Supermarkets reported internal inflation at % for HY2019 (HY2018: approx. +0.7%)
Towards the end of FY2019 an increase in internal inflation is anticipated in SA as commodity prices could increase
SOURCE: Shoprite Holdings, Ti Economic Indicators Report, StatsSA

15. In Summary
A weak half result for the Group at half-year with turnover +0.2% from R75.70bn to R75.8bn, despite massive disruptions and tough trade environment
The positives:
Positive sales growth for SA Supermarkets +2.6% to R56.1bn despite massive disruption from system roll out and industrial action
Internal inflation for the core business, SA Supermarkets well below last year and CPI at +0.4%
SAP ERP system implemented, all stores and distribution centres in all countries on one common technology platform to enable better inventory accuracy and improved efficiencies whilst addressing scalability
The negatives:
Sales growth in Non-SA Supermarkets -13.3% with massive currency devaluation in Angola
Gross profit -2.8% from R18.03bn to R17.53bn with gross margin decreasing from 23.8% to 23.1%
Trading profit -19.0% from R4.1bn to R3.3bn with trading margin decreasing from 5.4% to 4.4%
HEPS -24.1% from cents to cents

16. Outlook
Trading will remain challenging for South African retailers, this is the new normal, with South Africa’s GDP forecasts muted. In a climate of geo-political uncertainty globally, over and above domestic challenges, with fiscal constraints and low investment growth, there remains little hope for growth in consumer spending in the short to medium term. Consumers face ongoing pressure on their disposable income, despite the lower inflation, as interest rates rise, credit extensions are hard to come by and unemployment levels remain high. The Group remains confident that the outlook for the second half of the year is positive, and although Shoprite is unlikely to achieve full growth due to H1 performance, the second half will be telling in terms of return on the significant investments made by the business into supply chain infrastructure, systems and formats.

17. Maryla Masojada | Lead Analyst Carey Leighton | Associate Analyst