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SHOPRITE HOLDINGS LIMITED - Operational update and trading update

Release Date: 30/07/2019 08:00
Code(s): SHP     PDF:  
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Operational update and trading update

(Incorporated in the Republic of South Africa)
(Registration no. 1936/007721/06)
ISIN no: ZAE000012084

JSE share code: SHP
NSX share code: SRH
LuSE share code: SHOPRITE
(“Shoprite Holdings” or “The Group”)


Pieter Engelbrecht, Chief Executive:

“Emerging from a transformational year in 2018, which resulted in only marginal sales growth in
the first half to December, we are pleased to report improved growth in the second half with
Group sales up 6.5% (excluding hyperinflation impact). This performance was driven mainly by
our Supermarkets RSA operation growing sales by 7.4% in the six months to June 2019 and
9.4% in the final quarter. The market share gain in the most recent quarter is testament to our
core South African business being back to full operational strength.

Trading conditions in the rest of Africa remain relentless as the results attest but given our
optimism for the long-term food retail opportunity on the continent, we remain resolute in our
purpose to be Africa’s most affordable and accessible retailer.

The combination of on-going low food inflation in South Africa and currency devaluations in the
rest of Africa have resulted in this being a most challenging year, however the continued
improvement throughout the second half is pleasing and product availability now surpasses pre-
system implementation levels.

We honoured our promise of lower prices, serving more than 1.1 billion customers in the year.
Better customer service levels and recent market share gains are indicative that the challenges
following last year’s industrial action and the successful deployment of our new enterprise-wide
system are now behind us. We look forward to the returns from the new capabilities this large
scale system implementation has enabled. Shoprite has emerged a stronger, fitter retailer with
many exciting innovations underway.

The Group’s expansion remains on track with 80 new supermarkets opened in the period and
88 planned for the next year. The Shoprite team is making headway in all of our strategic areas
of focus; including advancing our digital transformation agenda, growing Checkers’ share of
premium food retail, building a better franchise offer and increasing our private label penetration.
Ultimately these have all laid a stronger foundation for growth in the medium term.”

Operational update (52 weeks ended 30 June 2019)

Excluding hyperinflation, the Group increased total turnover by 3.2% (0.1% like for like) to
approximately R150.6 billion in the period to June 2019. The Group’s supermarkets increased
the number of customers served by 2.3% and product volumes sold by 1.2%. Including the
impact of the Angolan hyperinflation accounting adjustment, Group turnover increased by 3.6%
for the full year.

The Group adopted IFRS 15 with effect from 2 July 2018 and these results include the required
Segmental sales performance for the twelve months to June 2019 (excluding the impact of
hyperinflation) is as follows:

                                                  H1 ended          H2 ended               Total
                                                  Dec 2018          Jun 2019           2018/2019
  Supermarkets RSA                                    2.6%              7.4%                4.9%

  Supermarkets Non-RSA                               -13.3%             -0.8%              -7.7%

           *Angola                                   -45.0%            -27.8%             -38.4%

  Furniture                                            4.3%              3.6%               4.0%

  Other operating segments                             6.5%             13.8%              10.0%

  Total Operating Segments                             0.2%              6.5%               3.2%

The following provides context to the overall turnover growth for the twelve months:

       -     The Group’s core business, Supermarkets RSA, achieved 4.9% sales growth for the
             period (like for like growth: 1.9%) with an improved second half in which sales
             increased by 7.4% on the back of better customer and volume growth, as well as an
             improvement in on-shelf availability and promotional effectiveness. The full year
             performance should be viewed in the context of a first half that was impacted by the
             completion of our multi-year ERP IT system re-platforming as well as the aftermath
             of the May and June 2018 industrial action at our largest DC in Gauteng.
             Supermarkets RSA had a strong Easter sales period and the momentum culminated
             in final quarter sales growth of 9.4% and the Group reclaiming market share.
       -     Internal inflation for the year averaged just 1.2% for Supermarkets RSA. Despite an
             uptick towards year end, it remained lower for longer than was anticipated with 9,679
             items still in deflation in June, many of which are in categories in which the Group
             commands a higher than average market share.
       -     The Checkers chain led the supermarkets’ growth, making strides in improving our
             fresh offer and gaining market share in fresh produce and convenience meals. The
             accelerated rollout of our new FreshX concept stores is showing exceptional
       -     Shoprite’s growth for the year was subdued given the reliance on many food
             categories in deflation as well as the vulnerability of it’s core target consumers to
             prevailing economic headwinds. Whilst the primary Shoprite consumer base
             remains under significant pressure in a strained economy, the Shoprite brand has
             retained its price leadership, evidenced in the market share gains in the most recent
       -     Sales growth in the Usave format was hardest hit in the first half by the combination
             of deflation and the supply chain issues causing out of stocks in Gauteng, its largest
             regional market.
       -     The improvement in our private label offer has seen its participation to RSA sales
             grow by a further 30 basis points, offering better value to consumers from budget to
             super premium categories.
       -     LiquorShop remained a standout performer recording strong double digit growth for
             the period. This week marks a significant milestone as we are set to open our 500th
       -     Online sales which encompass Click & Collect orders and our on-demand liquor
             home delivery partnership has increased 386% with rapid customer acceptance.
       -     Supermarkets Non-RSA recorded a decline in turnover of 7.7% which impacted the
             overall Group sales performance (on a constant currency basis, turnover for the year
             increased by 0.9%). The second half saw the decline in sales slowing to 0.8% from
             the -13.3% in the first half. The underperformance was primarily a result of currency
             devaluations in the major countries where the Group trades in the rest of Africa,
             which negatively impacted sales in rand terms. The rebasing of the sales
             performance in the Angolan operation, the largest contributor in our Non-RSA
             portfolio, remained a drag on the overall Group performance. Angola’s supermarkets
             sales declined 38.4% in rand terms after the dramatic 105.4% devaluation of the
             Angola kwanza to the US dollar since January 2018, combined with an economic
        -    Excluding Angola, Supermarkets Non-RSA achieved positive sales growth of 5.8%
             in constant currency amidst difficult macroeconomic conditions persisting in all
        -    During the financial year, the currencies of the other large countries in which we
             trade, namely Zambia and Nigeria, also showed a sharp decline against the US
             dollar of 29.4% and 17.9% respectively.
        -    The Group’s Furniture division increased sales by 4.0% for the period, affected
             particularly by the Non-RSA operating environment.
        -    Other operating segments (OK Franchise, Medirite Pharmacy and Checkers Food
             Services) achieved pleasing growth of 10.0%.


Notwithstanding the acceleration in Supermarkets RSA’s second half sales, increases in the
cost of employment from new legislation, rent and electricity exceeded the year’s overall top line
growth given the impact of first half factors. Predominantly, the lost sales following industrial
action at our largest distribution centre as well as the gross margin adjustment relating to the
change to the moving average method of accounting for inventory, have resulted in lower
profitability than the prior year. Pleasingly though, trading profit increased in the second half at
a pace ahead of turnover growth.

As a result of forex shortages and local currency weakness, the profitability of Supermarkets
Non-RSA deteriorated meaningfully in the second half resulting in a trading loss for the period.

The Group therefore anticipates lower earnings per share (“EPS”) and headline earnings per
share (“HEPS”) (after taking hyperinflation into account) for the full year ended 30 June 2019,
falling within the ranges below:

                                            Estimated             Restated             Expected
                                            June 2019            June 2018             % change

 Basic HEPS (cents)                     774.2 - 832.5                971.4        (14.3) to (20.3)

 Basic EPS (cents)                      762.8 - 819.0                936.0        (12.5) to (18.5)


Impact of Angola hyperinflation adjustment
For the period ended 30 June 2019, the economy of Angola was still assessed to be
hyperinflationary. The Group therefore continued the application of hyperinflation accounting in
Angola for the period under review.

The Group discloses the unaudited hyperinflation adjustment information in order to indicate the
effect of the restatement due to the change in the general price index of the hyperinflationary

To present this information, the functional currency of Angola is adjusted to take into account
the value of money at the end of the reporting period.
The financial impact of hyperinflation on the current period’s turnover is shown below:

                   Pro Forma                 Reported                           Pro Forma

                   Change on        Change on     52 weeks to   Hyperinflation     52 weeks to
                prior period     prior period    30 June 2019       adjustment    30 June 2019

                           %                %              Rm               Rm              Rm

   Total                 3.2              3.6         150 395             (199)         150 594

Impact of the Group’s pro forma constant currency disclosure
The Group discloses unaudited constant currency information to indicate the Group’s
Supermarkets Non-RSA operating segment performance in terms of sales growth, excluding
the effect of foreign currency fluctuations. To present this information, current period turnover
for entities reporting in currencies other than ZAR are converted from local currency actuals into
ZAR at the prior year’s actual average exchange rates on a country-by-country basis. In
addition, in respect of Angola, the constant currency information has been prepared excluding
the impact of hyperinflation.

The table below sets out the percentage change in turnover, based on the actual results for the
period, in reported currency and constant currency for the following major currencies. The total
impact on Supermarkets Non-RSA is also reflected after consolidating all currencies in this

   % Change in turnover on prior period 52                       Reported              Constant
   weeks                                                         currency              currency
   Angola kwanza                                                    (38.4)                (12.2)

   Nigeria naira                                                     (0.0)                  5.6

   Zambia kwacha                                                      0.4                  10.1

   Mozambique metical                                                 7.8                 (1.0)
   Total Supermarkets Non-RSA                                        (7.7)                  0.9

   Supermarkets Non-RSA excluding Angola                              3.8                   5.8

The above financial information is the responsibility of the directors of Shoprite and has not been
reviewed or reported on by the Group’s auditors. The hyperinflationary adjustment and constant
currency information has been prepared for illustrative purposes only.

The results for the period ended 30 June 2019 are expected to be released on or about 20
August 2019.

Pieter Engelbrecht                    Anton de Bruyn
Chief executive officer               Chief financial officer

Tel 021 980 4000

Date issued: 30 July 2019

Sponsor: Nedbank Corporate and Investment Banking

Date: 30/07/2019 08:00:00
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