Shoprite Holdings (JSE: SHP) Surpasses Market Expectations: Key Insights and Future Outlook
Introduction
Shoprite Holdings (JSE: SHP), South Africa's retail powerhouse, has once again outshone market expectations with its 2024 earnings report. CEO Pieter Engelbrecht showcased the company’s impressive growth trajectory, marking a fifth consecutive year of outperforming competitors. Shoprite's gross profit surged by 11.7%, hitting nearly ZAR58 billion. Learn how Shoprite’s strategic initiatives and market dominance can impact your finances.
Key Highlights from Shoprite’s Earnings Call
- Revenue and Profit Surge: Shoprite’s revenue skyrocketed, doubling market performance. Gross profit increased to nearly ZAR58 billion, a rise of 11.7%.
- Expansion and Innovation: The company opened 292 new stores and plans to open 1,000 more in South Africa over the next five years. Shoprite's digital and technology investments, including the extra savings subscription model and the 60-60 delivery service, have been pivotal.
- Commitment to Affordability: Shoprite remains the most affordable retailer in South Africa, offering products at ZAR1 and instant savings at checkout.
- Sustainability and Community Support: Focused on sustainability, Shoprite has made substantial food donations and is working toward renewable energy targets.
Detailed Analysis
Financial Performance
- Revenue and Gross Profit: Shoprite's revenue and gross profit have consistently outpaced market expectations. With a gross profit up by 11.7%, the company’s financial health remains robust.
- Store Expansion: The opening of 292 new stores and a plan to add 1,000 more in the next five years indicates aggressive expansion. This will not only increase market share but also create more employment opportunities.
- Digital Innovations: Shoprite’s 60-60 delivery service and extra savings subscription model are key differentiators, enhancing customer convenience and loyalty.
Strategic Focus
- Customer Affordability: Shoprite’s commitment to affordability is evident in its pricing strategy, offering essential products at ZAR1 and providing substantial instant savings.
- Technology and Digital Investments: Investments in smarter pricing tools and same-day delivery services have fortified Shoprite’s market position.
- Sustainability: Shoprite’s focus on renewable energy and food donations underscores its commitment to community support and environmental sustainability.
Challenges and Opportunities
Bearish Highlights
- Furniture Market: Shoprite faces challenges in its furniture segment, with modest sales growth.
- Infrastructure Issues: Persistent infrastructure problems and low economic growth pose risks.
- Rising Expenses: Total expenses rose by 12.1%, with significant contributions from depreciation and employee benefits.
Bullish Highlights
- Market Share Gains: Shoprite achieved 64 consecutive months of market share gains.
- Precision Retailing: The focus on personalized offerings and precision retailing has strengthened its competitive edge.
- Diversification: Expansion into specialized stores like Medirite Plus and unique clothing by Checkers shows strategic diversification.
Q&A Highlights
- Discovery Vitality Program: CEO Pieter Engelbrecht discussed the benefits of launching the Discovery (NASDAQ: D) Vitality program for Checkers.
- Store Expansion Targets: Shoprite aims to open 1,000 Usave stores in the next five years, with 33 new stores already signed for.
Future Outlook
- Technological and Digital Investments: Shoprite will continue to invest in technology and digital platforms to enhance customer experience and operational efficiency.
- Expansion Plans: The strategic plan to open 1,000 new stores over the next five years reflects confidence in market growth.
- Optimistic Market View: Shoprite is optimistic about maintaining income margin and cost growth ratios in the South African market.
How This Affects You
Understanding Shoprite's strategic moves and financial health can provide valuable insights for your investment decisions. Here’s a simple breakdown:
- Investment Potential: Shoprite’s robust financial performance and strategic expansion make it a compelling investment opportunity.
- Consumer Benefits: As a consumer, you can benefit from Shoprite’s commitment to affordability and convenience through its digital innovations.
- Economic Impact: Shoprite’s aggressive expansion will likely create more jobs, contributing positively to the South African economy.
Conclusion
Shoprite Holdings continues to set the benchmark in the retail sector with its strategic focus on growth, affordability, and sustainability. For investors, consumers, and stakeholders, understanding these dynamics is crucial for making informed decisions that can positively impact your finances and lifestyle.
Full Transcript - None (SRHGF) Q4 2024
Pieter Engelbrecht: Good morning, and welcome to the 2024 results presentation for the 52 weeks ended 30 June 2024. Special welcome to our shareholders, fund managers, the media, and also our employees that are joining on this link. I want to use that opportunity before we go into more of the detail. I absolutely are indebted to the people of Shoprite. Team Shoprite has once again defied all odds, deliver an exceptional set of results, of which I am extremely proud and words is not enough to think Team Shoprite. Our presentation will have the same format as usual, with the exception that from the overall helicopter view of what happened in the past year, I will continue updating you on where our medium-term thinking is, where our attention will be directed to. And then finally, Anton will unpack the financial detail and we did this order change because I know in the end, you are very interested in what the numbers are and what they mean and how to interpret them, for the fund managers important to do your modeling on that. So, we thought let's leave you with that, and then we end with the questions if you want clarity on things that we did not cover. It is a fairly comprehensive attempt from us to cover the entire business in as close as an hour as we can. It is a rather large business to cover so quickly, but we will do our best. In summary, it's again fantastic performance, outperforming the market on a revenue side, almost by double. And it is the fifth year in a row that the Shoprite group has managed to outrun the market. We are not going to bore you with excuses and what went wrong and what is difficult. We all face them. So, I will not throughout the presentation refer to load sharing infrastructure problems, high interest rates, low economic growth, customers struggling affordability, none of that. You all know -- a very familiar with the South African context. So, we will rather stick to what we can control. So just a quick summary of the year that was. For us, it remains imperative that we execute with precision what we deem to be our purpose and what we set out there to achieve for customers. Customers drive what we do and their needs and their requirements and changes in behavior, that is what we base our actions on, not the reverse. Very proud to be recognized as a top employer for 2024. We employed almost 6500 new members to our team. We opened 292 new stores. We have launched first the extra savings subscription model. That was a defensive play for new entrants in the market, and we see very good traction in that, followed by more digital investment on the Checkers Hyper proposition, new 24 name Shoprite Group is company of the year. Extra savings got some awards, the employee trust, that payouts worth over $500 million to qualified employees. It means that not only -- are we customer-focused, but our people are important. That's how we deliver through people. 60-60 continues to really light and inspired people. Like I mentioned, when we started the revenue or sales for that matter has grown double the market. And with that, by default, another year of very good market share gains. For me, staggering amount is if we look at the value that's attributed to additional sales for the year amounts to almost ZAR26 billion. That is incredible. If we talk percentages, just mentioning there that it's 12%, but the like-for-like sales, if you look at our internal inflation, it will explain why we had some good volume growth, and I'll get to that now. Gross profit, almost ZAR58 billion in monetary value, up 11.7%. And in this very competitive market, and I will Also, again, later on show the numbers that we have given back in discounts, instant discounts to consumers at all point but still managed to be the most affordable retailer and maintain our margins, slight reduction from 24.1% to 24% for this year year-on-year. Trading profit is up a healthy 12.4% above that of the sales growth. And later on, Anton will help clarify the difference between the trading profit growth and that of diluted headline earnings per share, which are equal to a 7.4% growth in the dividend paid this year versus last year. Very pleasing to say we have, again, it's now 5 years in a row, increased our number of customer visits and basket size growth is actually -- in this environment we're in is exceptional because you will see that customers are much more promotional item focused and hopefully, I think in the Shoprite environment because we give such good promotions and so wide for the things that people need that they save enough to be able to buy an additional item. The volume growth I've referenced to, the first half of the year, we did not grow positively on volumes, but that turns around in the second half where inflation actually came down, speaking to a little bit of the affordability of consumers or their ability to have discretionary income. And important, I always say this, is that we need to grow volume to assist our suppliers and manufacturers because that is the greatest tool to reduce their input costs. Sometimes it's good to just zoom out a little bit and let's look at a 3-year snapshot quickly. I mean just say where would be in 2021 and where are we now? And that's just the absolute numbers. It's not year-on-year-on-year. It is absolute between '21 and '24. And we've listed a few items there. So, sales grew by 43% or less rather say, that is more meaningful for me, it's almost ZAR73 billion. We have been speaking quite a bit about how other income is going to grow probably in excess of what revenue will grow in time to come with all these investments we made now starting to show a return on investment. And this will require us to start looking differently at margins as a percentage. If we look completely only at gross profit margin, I always say that customers don't really mind where the discount comes from, whether we took it from other income or we use some gross margin money to give them a better deal on a promotion and in time, we will have to adapt to that also. Dividends, I already mentioned, but it's an additional ZAR1 billion almost. Stores grew by 744. Its a lot, I know. And that's why we stay on quite strong capital spend, capital investment in these. Also, not only new stores but a fair amount of capital being invested in store revamps to make them fresh and new and enticing for people to come. Part of what I referenced why one gets the result of growing your customer base because it is a pleasant experience. And extra savings globally -- this is not only South Africa. Globally, this is a top-class program and also in absolute numbers, if one takes 31 million adults over the adult population of South Africa, that number is between 70%, 75%, which is incredible. And they use it, about 85% of our sales is accompanied with an extra savings swipe, 60-60 we all now know what a fantastic story it is 530%, and now it gets into numbers that it's difficult to comprehend, but continuous growth in this year again. So, I thought it will just give us a little glimpse of where were we and what has happened actually. But Again, for me, the absolute numbers is more meaningful than a percentages, percentages can have a low base and be high. So, in this case, it's a high base and big numbers. So, I have mentioned that we've outgrown the market by almost twice. We believe we are winning with our customers because we are so obsessed with what it is our customers need. The other thing that we're obsessed with, if I can use that word twice as data and I'll get to that also. But it's the data and effect driven decisions that we can make based on what we see customers want and how they behave, just as a reference point, if we exclude the Massmart stores, sales growth amounted 10.5% without question, Checkers is the fastest-growing grocer in the premium food segment. We're happy about that. It's almost as if we're currently in a scenario where Checkers and Shoprite is -- so Africa incorporated hedge between people that has more discretionary income and giving people that are very price-sensitive what they need at the absolute best prices. So -- and in time, depending on how the macroeconomics changes, those two interplays with each other 66%, up 58%. Usave sales increase for the year, 13.2%. Second half of the year grew actually 14.2%. So, it accelerated. Liquor Store, 20% up. Inflation, interesting. I mean, that's why the graph -- it looks like there's a decline. But it's the decline in inflation rate. And consistently, you can see our internal inflation has been below official food inflation. Ending for the year at 4.2% against the CPI of 5.4%. And the food inflation of June only at 3.1%. Now I know everybody says in high inflation, good for retailers, but we have reached the point where customers have [ph] rollout. They cannot anymore, customers, meaning actually consumers. And there's no point in inflation. If I don't have any discretionary income left and prices just keep on going up. I have to buy less. I don't have more money and therefore, we think that lower inflation is not bad for us as a [indiscernible] actually -- I think it's good for volume growth, certainly. And we will certainly make sure that we give customers -- continue to give customers the best possible promotionals and deals. I've said a couple of times before that we don't do knee jerk. We've got a strategy and we execute against that strategy. And for us, it's the excellence of execution that surprise and delights the customer, and that is our obsession with the customer and make sure that what we have determined is what they need and want is that we do it with operational excellence. We've got this multiyear smarter Shoprite data. And I know I probably overemphasized the data and the importance of it. But I just don't see one getting ahead without understanding the consumer better. And take the guessing work out of what to do and where you'll give your attention. Hence, the building of this data constantly for the last 7 years, 8 years to get a better understanding and then be able to deploy new technologies like artificial intelligence, et cetera, into our tech investments to give not us only an ROI, but a better experience to the consumer, both in-store and digital. We have upgraded the stores, don't underestimate the in-store experience when you want to go digital omnichannel. It can't be only one. Can't only invest on the digital and you let slip on win customers in store, they still spend more in store. But they use both. So, it's complementary. That's why we refer to ourselves as an omnichannel retailer. We continue to invest in technology, a very important part of our capital spend every year and it will continue to be. As a matter of fact, will probably increase. We continue to innovate and develop in our fresh food department section of the business for easier, better convenience and the investments in our culture and capabilities continuously to ensure not only in-store, but by the time that you're in your home your product is the fresh as possible. I've made reference to market share before 5 years of market share gains. In actual effect, is 64 months of consecutive market share gains. Sales growth versus the rest of market. If you look at that graph, it looks like it's a diminishing graph. So, a matter of it is obviously has to reference back to what the inflation is. What's important of the graph is that, that gap remains. Now we pride ourselves on saying we are Africa's most accessible and affordable retailer. It's not a marketing story. It's factual. So much so, and I love this, very creative from our marketing team is to create what it is in the form of the logo because affordability for us equals a promise. It's not a statement, it's not a marketing ploy. And if I show you that number now or we talk about that number of what that meant for the consumer. But that sort of collect for me what it is that Shoprite in particular stands for, a price promise, most affordable supermarket in South Africa. We stick to our five range solutions. My old story of, I can do something small. I can be a car guard for an hour, so I can get a ZAR5 coin then I can buy a loaf of bread. Since 2016, we kept the price at ZAR5. If you compare that with what is currently the average price of [indiscernible] in bread, ZAR17.99 around, maybe on promotion, ZAR15.99. You understand that we invest a lot to help people actually survive and make things, or make a meal, something in the stomach for ZAR5. On top of that, there's no other retailer that I'm aware of that sells products for ZAR1 that is commercially produced and available every day. But the Shoprite Group does, you think about that. You can pick up a ZAR1 coin and surprise and delight the kit with a packet of biscuits at ZAR1. That's what we think about. When I say we customer obsessed, that's been the result of that. To put it into the bigger picture for me, a staggering amount, I mean it's almost difficult to believe. But almost ZAR17 billion in instant savings at Toll point in the last year, through our extra savings customer discounts. Customers love it on the spot, not points and I redeem it later for a coffee market. instantly. And on the products that I need so that I can maybe buy something extra. I can now buy a ZAR1 suite for my kid also. What has become a very fine balance is the discounts, the promotions, the width of the promotion, balancing that with the gross profit margin because you will see there's the hires that contribution of promotional sales to the basket that we've ever had, and it's continuously increasing. It actually varies between brands. Some brands is higher than that and still for the Shoprite Group to maintain gross profit margin is exemplary. Most of you are familiar with this slide, where we illustrate just how we cover the entire spectrum of the consumer market. I especially show this for our international shareholders. It is clear that we are a multi-branded retailer for the purpose to cover the entire spectrum of the South African consumer market. It goes from Usave, our franchise model across the spectrum Checkers at the more affluent market and Shoprite just this mass morale and price-sensitive market. And with it all covering the entire customer base. We have of late went into some adjacent categories for a very good reason. We are in PET, but there are certain PET products only allow to be sold in specialized stores. I just quickly want to single out Medirite Plus