Market punishes Spar

JSE-listed Spar’s latest full-year results fell short of market expectations and saw its share price slide almost 13% on Wednesday to close at R144.10.

At the beginning of November last year (2021), Spar stood at around R200 a share.

The grocery wholesale and distribution group reported a decrease in full-year earnings per share (EPS) of 4.9% to 1 18.2 cents, while diluted headline earnings per share (Heps) fell 2.9%, to 1 159.1 cents.

Read: Spar shares slide as group slashes FY dividend by 51%

Sasfin senior equity analyst Alec Abraham tells Moneyweb that although understandable, he is shocked at the extent of the market’s reaction to Spar’s 2022 full-year results.

“I wasn’t expecting this bad a reaction from the market to be completely honest, but basically the negatives were that they missed expectations.

“Most analysts were looking for 3% to 5% earnings growth and they came in at minus 3%.”

Abraham says the drop in the share price can also be attributed to the weak performance of its South Africa operations.

Competitively slow …

Although the grocery retail sector hasn’t fully recovered from the effects of the Covid-19 pandemic, Abraham notes that Spar’s competitors are at least making strides in trying to get back to the pre-pandemic glory days – while its recovery has remained disappointingly slow.

For the full year, Spar’s core wholesale grocery business grew sales by 4.6%, while for the year ending July, competitor Shoprite reported a double-digit (10.1%) increase in sales within its South African supermarkets business.

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“What was certainly bad for me was that [Spar’s] South African operations appeared to be very weak again. Its sales growth in South Africa appeared to be very weak when you compared them to Pick n Pay and Shoprite, it was very poor,” says Abraham.

New dividend policy

Another factor contributing to the market’s reaction is the group’s temporary policy to direct dividends away from shareholders and towards financing the implementation of systems upgrades across its operations as well as other growth projects.

The policy – announced in February – was implemented for the first time this year and was the reason behind Spar’s dividend being more than 50% lower than the one declared for the prior financial year.

“I think it’s prudent they decided to lower the dividend to pay for certain expenses,” says Abraham.

“When you consider that as an investor you’ve already gotten quite a poor return on your Spar shares, and now they cut the dividend as well, clearly the market was unhappy with that as well.”

Poland losses

Spar’s business in Poland continued to register losses in FY2022, albeit at lower levels.

Spar Poland reduced its operating losses by 15.5% in reporting currency terms, to R403 million. This was down from losses of R477.2 million for the prior financial year.

This business is battling numerous challenges, including elevated operational costs in fuel and energy – a trend observed in the group’s other European operations as well.

The group also reported that it lost 58 retailers in Poland due to low levels of purchasing loyalty – but pointed out that it had signed new contracts that better protect the Poland operations.

“The new contracts required a minimum level of retailer loyalty and consequently retailer loyalty for the retailers in the south reached 40% from 27% in the prior period,” it said.

Abraham says investors were hoping for a better improvement in Poland.

“They still did relatively well on their top line in Poland,” he adds, “and more importantly, because the loyalty levels of those [retailers] who’ve stayed is much higher, it improves the efficiency of the distribution centre, and their margin improved quite substantially.”