In just a couple of minutes, Shoprite's value rocketed by billions — despite a profit warning

Business Insider SA
Shoprite's share price over the past five trading
Shoprite's share price over the past five trading days. Source: Fin24
  • Shoprite has seen a massive rally on Tuesday morning after releasing a trading update.
  • While its profit for the year will fall by up to a fifth, its sales in South Africa surprised on the upside.
  • Shoprite may be taking market share back from Pick n Pay - also, consumers seem to be spending more.
  • For more stories, go to Business Insider SA.

In the first few minutes of trading on Tuesday, Shoprite's share price jumped by more than 9% - adding more than R7 billion to its market capitalisation. Bloomberg reported it was its biggest rally in 22 years.

Investors were reacting to a new trading update: Shoprite warned that its profits would fall by up to 20% for the past year, but also reported a strong increase in sales in South Africa.

Shoprite’s new numbers – along with a similarly strong report from Woolworths recently – indicate that South African consumers are spending more after a bleak second half of 2018, says Stephán Engelbrecht, a fund manager at Anchor Capital.

Over the six months to June, Shoprite’s SA sales rose 7.4% - while in the last three months alone, sales jumped 9.4%. This is a marked improvement from the weak 2.6% sales growth reported in the six months to end-December. Checkers and LiquorShop were the two outperformers in the group.

Read: Hit with at least one armed robbery a day, Shoprite basically set up its own police force

Shoprite says it has gained back market share in the past quarter. Pick n Pay stole customers from the retailer over the past year as it offered steep price cuts. It also benefited from Shoprite’s own problems – particularly at its Gauteng distribution centre. A strike and the implementation of a new warehouse system caused a shortage of products, which may have encouraged shoppers (specifically at Checkers) to go to Pick n Pay instead.

Shoprite also had a tough time in the rest of the Africa, adding that trading conditions there "remain relentless". Sales fell by more than 13% in the past six months in other African markets, largely as a result of currency devaluations. Angola’s supermarket sales slumped by 38% in rand terms after the dramatic 105.4% devaluation of the Angola kwanza to the US dollar since January 2018.

Even after the massive jump on Tuesday morning, the share was still almost a percent lower than where it was a week ago. Shoprite has lost more than 20% of its value this year as investors worry about faltering growth.

Shoprite's share price. Source: Fin24
Shoprite's share price. Source: Fin24

Shoprite served more than 1.1 billion customers over the past year, and is planning to open 88 new supermarkets in the next year. This is more than the 80 opened in the past year.

On average, Shoprite product price rose 1.2% in South Africa over the past year. Almost 10,000 products were cheaper last month than a year before. But Shoprite said price started ticking higher in recent weeks.

Shoprite said its headline earnings for the year to end-June will be 14% to 20% lower as “increases in the cost of employment from new legislation” (presumably the minimum wage), rent and electricity exceeded the year’s sales growth. “Pleasingly though, trading profit increased in the second half at a pace ahead of turnover growth.”

Engelbrecht says investors may start to see value in Shoprite – it is currently trading at a price earnings ratio of 16.83 times – compared to an average of 17.5 over the past five years.

While it is still too early to get excited about consumer spending, he says the food retailers – Spar, Shoprite and Pick n Pay – are starting to look more attractive as food prices pick up. He is still careful about apparel retailers, which depends on discretionary spending.

Shoprite’s results will be released on or about 20 August.

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