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SHOPRITE HOLDINGS LIMITED - Operational update

Release Date: 22/01/2019 09:00
Code(s): SHP     PDF:  
Wrap Text
Operational update

SHOPRITE HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
Registration no. 1936/007721/06
ISIN: ZAE000012084
JSE share code: SHP
NSX share code: SRH
LuSE share code: SHOPRITE ("The Group")

OPERATIONAL UPDATE
The Shoprite Group increased total turnover by 0.03% to approximately
R72.9bn billion in the 6 months to December 2018. Including the impact of
the Angolan hyperinflation accounting adjustment, the Group's turnover
declined by 0.01%.

In difficult circumstances, the Group managed to increase the number of
customer visits by 1.7% and product volumes by 0.2%. Segmental sales
performance for the six months to December 2018 (excluding the impact of
hyperinflation) is as follows:

                                       Q1 ended     Q2 ended       H1 Total
                                       Sep 2018     Dec 2018      2018/2019
Supermarkets RSA                          1.89%        3.18%          2.58%
Supermarkets Non-RSA                     -8.62%      -17.24%        -13.27%
*Angola                                 -39.25%      -49.55%        -44.95%
Furniture                                 8.67%        1.34%          4.30%
Other Divisions                           5.07%       11.68%          8.40%
Total Group                               0.42%       -0.30%          0.03%

The Group adopted IFRS 15 with effect from 2 July 2018. The current results
include the required restatements.

The following provides context to the overall turnover growth for the six
months:
-  The Group's core business, Supermarkets RSA, achieved 2.58% sales
   growth for the period. Persistently low internal food inflation in
   South Africa of only 0.2% for the period marks 18 months of near
   stagnant prices of basic foods in which the Group has a larger market
   share. The core Shoprite middle income consumer base remains under
   pressure. This was evidenced in Christmas sales in categories like
   Back to School essentials which outperformed traditional discretionary
   purchases such as toys for the first time.
-  Supermarkets RSA had stronger Christmas sales of 3.68% in December,
   achieved on the back of improved customer and volume growth which
   recovered alongside better product availability towards the end of the
   period. This is a much improved growth trend and almost double the
   1.89% for the first quarter, albeit below our expectations.
-  Liquor stores remain a standout performer with 20.09% sales growth for
   the period.
-  As previously reported, product availability challenges stemming from
   the Group's largest Distribution Centre in Gauteng, which accounts for
   53% of total centralised food distribution for the RSA supermarkets
   business, affected sales in the period. Industrial action followed
   by the deployment of our new warehousing system shortly after the
   labour disruption hampered the ability to adequately meet demand which
   resulted in lost sales opportunities, which the Group was unable to
   recover.
-  Supermarkets Non-RSA recorded a decline in turnover of 13.27% in rand
   terms (0.05% growth in constant currency terms) which impacted the
   overall Group sales performance. This was primarily a result of sharp
   devaluations in the currencies of the major countries in the rest of
   Africa negatively impacting the sales performance in rand terms. The
   lower turnover is mainly attributed to a reset of the sales performance
   of the Angolan operation, declining 44.95% in rand terms after a
   significant 85.13% devaluation of the Angolan kwanza to the US dollar
   since January 2018. This was a severe drag on the performance of the
   Group given the size of the Angolan operation. The Angolan economy
   remains in recession with weaker consumer spending evidenced in the
   second quarter.
-  Excluding Angola, Supermarkets Non-RSA managed to achieve a positive
   sales growth of 4.41% in constant currency.
-  During 2018, the currencies of the other large countries in which we
   trade, namely Zambia (-19.48%) and Nigeria (-16.86%), also showed a
   sharp decline against the US dollar. Nigeria's Q2 reflected performance
   was negatively affected by the Group applying the weaker NIFEX rate
   for the Nigerian naira in December 2018 when converting to reporting
   currency, whereas the Central Bank of Nigeria's exchange rate has been
   used historically.

Our largest ever end-to-end system replacement represents a critical and
significant investment in improving our global competitiveness. Although the
timing was inopportune, the replacement was essential to sustain our future
growth. The transformational changes we made during the year-long migration
to the new IT system were challenging, but the deployment has been
completed. We are now confident that the Group is in a position to deliver
improved availability, price and ultimately a better shopping experience for
our customers going forward.

The Group's expansion remains on track with 50 new supermarkets opened in
the period, and plans are finalised to open another 37 before June 2019.

The Group's Furniture division increased sales by 4.30% for the period.
Second quarter sales were lower than expected as excessive demand from Black
Friday resulted in suppliers being unable to meet delivery before year-end
cut off. Non-RSA Furniture sales were also affected by the Angolan currency
devaluation.

Other operating segments (OK Franchise, Medirite Pharmacy and Checkers Food
Services) achieved pleasing growth of 8.40% after a strong festive season
for the OK Franchise division in particular.

Low food inflation and demanding trading conditions are expected to continue
in the second half, but the Group remains positive about its operational
strength, customer support for its brands and is making progress on its
longer term strategic priorities. These include building a stronger OK
Franchise offer and attracting better share of wallet from upmarket
consumers. Our Private Label enhancement continues, lead by the recent
launch of a pioneering, healthier-eating Simple Truth range in the Checkers
banner.

The positive trading trend continued in January with healthy growth in our
Back to School promotion. We are confident of a much improved second half as
the impact of various once-offs continue to ease and the benefit of the new
national minimum wage filters into food expenditure.

PRO FORMA FINANCIAL INFORMATION
Impact of Angola hyperinflation adjustment
For the period ended 30 December 2018, 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 economy. It will also
facilitate comparisons against the prior period's results which were
prepared before the Angolan economy was assessed to be 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       Reported     Pro Forma      Pro Forma
                                        26 weeks                     26 weeks
              Change       Change             to         Hyper-            to
            on prior     on prior    30 December      inflation   30 December
              period       period           2018     adjustment          2018
                   %            %             Rm             Rm            Rm
Total
Turnover        0.03        -0.01          72 914            30       72 944

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 Supermarket Non-RSA
is also reflected after consolidating all currencies in this segment.

% Change in turnover on prior period 26 weeks         Reported      Constant
                                                      currency      currency
Angola kwanza                                           -44.95         -9.93
Nigeria naira                                            -1.44          8.45
Zambia kwacha                                             0.68         11.03
Mozambique metical                                        1.54         -3.98
Total Supermarkets Non-RSA                              -13.27          0.05
Supermarkets Non-RSA excluding Angola                     0.59          4.41

The above financial information, including estimated financial information,
is the responsibility of the directors of Shoprite Holdings Ltd 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 consolidated financial results for the
review period will be published on or about 26 February 2019.

Pieter Engelbrecht                  Anton de Bruyn
Chief executive officer           Chief financial officer

Tel 021 980 4000

Date issued: 22 January 2019

Sponsor: Nedbank Corporate and Investment Banking

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