Spar: out of dips for now?

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Spar: out of dips for now?
Credit: © Reuters.

Spar has released a trading update for the 18 weeks to 28 January 2022. As the local grocery counters go, this is one of the more interesting plays this year.

Shareholders have had a difficult time recently, with a poor update from the business in Poland driving a sharp sell-off at the end of 2021. Not all dips are worth buying of course, but this one has shown a lot of promise. Grocery businesses generally like periods of inflation, as cost increases can be pushed through to consumers on most of the product categories.

After dropping below R160 in December, the share price has recovered more than 10% of its value. It closed yesterday at R176.80, a 3.7% jump after releasing the update. For context, it was trading at R196 before the sell-off.

Before delving into the segments, I want to mention that group sales increased 5.8%. We don't have any guidance in the announcement on group profitability.

Over this 18-week period (which includes the all-important festive trade), Spar South Africa's wholesale sales increased by 8.2% during a period when general food inflation was measured as 4.4%.

Spar as a listed company is actually a wholesaler and franchisor, unlike the other grocery retailers which own either all or the majority of their stores. When the group talks about wholesale turnover, this is the turnover attributable to shareholders. Retail turnover would be the sales achieved in the stores, which isn't the same as wholesale growth as Spar owners are not forced to procure from the listed company.

There are still 28 Spar stores closed as a result of the riots. These businesses are usually owned by entrepreneurs in the community, not the listed company.

Grocery sales only increased 3.7%. As you can probably guess, the major driver was a recovery in the TOPS alcohol business (sales up 55.8%) which was allowed to trade properly in this period, unlike in the corresponding period in the prior year which had 58 days lost.

I was quite impressed with the result from Build it, up 1.8% despite contending with an exceptionally strong base. As I wrote in the Italtile update, the DIY (or "cocooning") trade is certainly over. Either of these stores remain closed after the riots.

The other thing you need to understand about the locally-listed Spar company is that the group also operates in Ireland, Switzerland and most recently Poland. As always, plucky South Africans are punching above our weight. The business in Ireland and South-West England (called BWG Foods) is exposed to the hospitality industry. This has been a really tough space to play in.

As a recovery has come through in that sector, turnover increased by 6.9% in Euros. It could've been a lot better had it not been for restrictions over the festive period as a result of the outbreak of Omicron. Conversely, the EUROSPAR and Appleby Westward supermarkets in this segment were negatively impacted by a switch in consumer spending towards hospitality and away from home entertainment.

The business in Switzerland faced an extremely tough base. The Swiss like to travel across the border to buy food in cheaper places, as the cost of living in Switzerland is huge. In 2020, travel restrictions prevented that from happening, which is great for Spar. Although borders have been opened, the government doesn't like the trend of shopping elsewhere, so other steps have also been put in place to make that more difficult. This has helped turnover grow by 1.9% (CHF-denominated) in this period. A boost is expected from the conversion of a further 20 convenient stores on AVIA fuel forecourts into SPAR (JO: SPPJ ) stores.

We now arrive at the segment that has caused a few grey hairs for shareholders: Poland. Spar really struggled to integrate that acquisition during lockdowns. Pleasingly, turnover is up 11.8% (PLS-denominated) and the keywords "retailer loyalty" have been used in a positive narrative. This is the percentage of goods purchased by the retailers from SPAR on a wholesale basis and has increased by 300bps to over 30%. This talks to the support from franchisees towards the head office, which is where things previously fell over.

Spar kindly provides pre-pandemic comparables for each segment. The core SA grocery business is only up 6.7% vs. the corresponding period just before the pandemic. The rest of the business is flying: TOPS 27.9%, Build it 27.8%, BWG 11.5% (in EUR), Switzerland 15.9% (in CHF) and Poland 54.4% (in PLN).

It all looks promising. As a final note, Spar South Africa is launching SPAR2U as an e-commerce platform for groceries and liquor. This is a critical point. To my knowledge, you can't buy liquor on Checkers Sixty60. This has been a key selling point for Pick n Pay (JO: PIKJ )'s ASAP offering. If Spar starts playing in the liquor delivery space, that could be a tough situation for Pick n Pay's on-demand business.

Interim results for the six months to March will be published on 8th June.

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