Published Date: 2021-11-18 | Source: INCE|Community | Author: The Finance Ghost
The Spar Group has a different business model to the other grocers on the JSE. Not only is the company a wholesaler rather than a retailer (as the holding company supplies the stores that you go to rather than owns them), but it also has extensive interests in Europe.
The company has released results for the year to September 2021 and the market hated them. The main issue is that Spar's acquisition of a turnaround opportunity in Poland is not working out so well. The share price closed 7.3% lower on the day despite diluted headline earnings per share being 5.5% higher.
Spar's local business has suffered from the lack of an online offer to compete with the likes of Sixty60, as well as alcohol restrictions that have hurt the TOPS business and thus the adjacent grocery stores as well. On the plus side, Build It grew turnover 23.5% as the home improvement trend continued.
The businesses in Ireland and Switzerland both performed well, with turnover up 3.5% and 5.6% respectively (both in local currency).
The problem child is Poland, which Spar needed to try relaunch during the pandemic. Turnover increased by 16.2% in local currency which sounds ok at first blush, but retailer loyalty of only 27% was way below the target of 40%. The conversion of corporate-owned to franchise stores caused a sharp drop in gross margin, which offset the revenue growth. The business in Poland recorded a loss of R527 million, a significant drag on the group result of around R3 billion.
Locally, Spar now aims to launch a centralised e-commerce platform for retailers. It's probably too little, too late. In my view, Spar should be focusing on the best possible execution of its convenience and deli models, as people returning to the office will be good for its business model.
The narrative around Ireland and Switzerland is positive, with Spar seemingly in a good space in both countries. The situation in Poland is now mission critical, with a plan to increase the number of stores in the region by 30% in the year ahead.
Spar declared a final dividend of 536 cents per share, taking the total for the year to 816 cents. To fund the expansion of the Polish business and a strategic SAP implementation, the group has warned that there may be an "adjustment to the current dividend policy" i.e. it may need to retain more cash going forward.
Spar is now a risky but interesting play in the grocery space. The market is now obsessed with Shoprite, so contrarian investors may be seeking value elsewhere in the sector, like in Spar.