The Spar Group
The Spar Group once again confounded the skeptics with an outstanding set of results for the year to September with the share price escalating by 13.25% to close at R205.00 on the news.
These results have been achieved despite the challenging operating conditions caused by the Covid-19 pandemic resulting in restrictions on the sale of liquor, building materials, and other non-essentials during the various periods applicable to the specific lockdowns.
The diversity of the income stream in terms of the merchandise offering, geographical footprint, and capital light franchise model are some of the reasons for the success of the group, aided by good execution.
Group revenue rose by 13.5% to R124.3bn thanks to demand for at-home meals. Although profits after tax declined by 9.60%, operating profit rose by 15.6%. Normalised diluted HEPS rose by 8.8%, and the dividend was increased by 8.8% to 665c per share. This is a better reflection of the group’s performance, excluding the start-up losses of the recently acquired Polish retail operations.
The groups BWG operations in Ireland delivered a robust set of results with the Eurospar format delivering sales growth of 11.5% in local currency. Likewise the Spar wholesale operations in Switzerland displayed a turnover increase of 11.6% in local currency.
Both operations benefited from various lockdowns and Europe is once again facing an escalation of Covid-19 cases.
The reopening of the South African economy should prove to be a boost for the group with the Tops liquor outlets back to previous trading hours. Meanwhile Build It is also back to normal trading conditions and the rollout of Pharmacy retailers continues with 132 stores operational.
The reorganization of the Polish operations has been delayed due to the second wave of Covid-19 and will now take time to turnaround. The prospects, with strong GDP growth and the robust growth of formal shopping, should to be positive for the division in 2021.
Cash of R6.4bn generated from operations showed a substantial improvement compared to R1.8bn in 2019. This was due to the timing of capital movements and accounting adjustments on rental expenses.
A strong balance sheet with cash of R723m, compared to the overdraft of R76.4m in 2019 is testament to the quality of management and consistent delivery. The Rand hedge contribution of 24% of revenue is likely to increase as offshore franchise operations expand. Group CEO Graham O’ Conner stated that Spar’s strategy was to earn 50% of income offshore in the long term. The outlook for Spar appears positive unlike many of its peers that have reported somewhat more mundane results.