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Shoprite has released results for the 26 weeks to 2nd January 2022.

The company has been on a charge, positioning itself as the darling of the grocery sector. That certainly wasn’t the case just a few years ago, so I will use this opportunity to remind you of how quickly things can change in the market.

Shoprite is flying in the South African market, posting huge growth of 11.3% in the supermarkets business (which contributes 79.5% of group sales). This is despite two of the Checkers Hyper stores being closed since July’s civil unrest.

There’s a base effect in this number, as LiquorShop (7.4% of the segment) increased sales by a whopping 49.8% thanks to fewer alcohol restrictions. Checkers and Checkers Hyper contributed 40% of segmental sales and grew by 11.4%, an impressive result reflecting ongoing market share gains among higher-LSM shoppers. Shoprite and Usave (52.5% of the segment) increased sales by a respectable 7.3%, demonstrating the group’s continued relevance among lower-LSM shoppers. The group disclosed 12.1% growth for Usave specifically, so there is double-digit growth being achieved at the top and bottom of the LSM curve.

These numbers were achieved with just 2.6% selling price inflation, so the supermarkets are pushing serious volumes through the door. New stores are also being rolled out, with a net 62 stores opened during the six months, creating 1,949 new jobs.

There are 23.1 million Shoprite and Checkers Xtra Savings Reward Programme members. Just let that number (and the associated data) sink in…

Although no disclosure is given of growth in Checkers Sixty60, they do describe it as being “very successful” and my anecdotal experience of the service supports that. The group has a deal with RTT Group to establish a new company for the on-demand logistics business, cementing the underlying operations in that channel.

The group is also experimenting with new store formats, opening twelve PetShop Science and one Little Me stand-alone baby store. I’m watching that with interest, as there’s a huge profit pool in baby clothes and products (I experienced that first-hand in the past two years!)

Beyond the Supermarkets RSA segment, the story is solid in Rest of Africa (sales growth of 8.4%) and in the Other Operating Segments (up 8.9%), but the Furniture segment has had a tough time with sales down 6.5%. This was attributed to the civil unrest and a high base during which people were stuck at home and buying new furniture.

Gross margin was consistent in the group at 24.1%, with expansion in Supermarkets RSA and a minor contraction in Supermarkets non-RSA. Checkers and Checkers Hyper are higher margin businesses, so outsized growth in those formats would improve the margin mix.

At group level, continuing operations recorded revenue growth of 10%, trading profit growth of 14.5% and headline earnings per share (HEPS) growth of 25.5%. The discontinued operations are in Kenya, Uganda and Madagascar.

The dividend is up 22%, nearly matching the increase in HEPS. The interim dividend is 233 cents per share, just over 1% of yesterday’s closing price. Notably, R854 million was invested in share buybacks in the past year.

Return in invested capital increased from 11.3% to 13.3%. The debt/equity ratio decreased from 27.9% to 22.9% as the group pumped cash through the system (R6.7 billion of it in the form of cash generated from operations).

The share price is up over 9% this year and more than 60% in the past 12 months. Shoprite is trading on a lofty price/earnings multiple as the market has piled into this stock. It is priced for perfection and seems to be delivering it.

Consumer goods specialist AVI has released results for the six months to December 2021. The company has struggled to find revenue growth in the past few years, relying instead on cost control and efficiencies to drive growth in headline earnings per share (HEPS).

The latest period is no different, with just 2.3% in revenue growth and a 2.5% decline in selling and administrative costs. The net result in a 6.7% increase in operating profit and a 7.1% increase in cash from operations, with the difference mainly attributable to movements in non-cash items. Notably, R103.3 million was paid out under the I&J Black Staff Scheme.

AVI achieved a 6.6% increase in HEPS. Almost in line with HEPS, the dividend per share has increased by 6.3% to 170 cents.

The failed deal with Mondelez for Snackworks was a costly affair, with expenses of R20 million incurred along the way. To put that into perspective, the civil unrest only resulted in R36.9 million in direct costs across Snackworks and Spitz.

At segmental level, Food and Beverage brands grew revenue 3.8% and operating profit by 4.8%, with the margin expansion driven by cost control. In Fashion Brands, revenue fell 2.9% but operating profit jumped by 14.4% thanks to considerable margin expansion in Footwear & Apparel.

Tea fans will find it interesting that the rooibos business suffered reduced selling prices, which negatively impacted revenue. Black tea revenue increased, as price increases more than offset the lower volumes in this period vs. the lockdown period where people were at home a lot more.

It wouldn’t be right to talk about tea and not coffee. In the latter, the Ciro out-of-home coffee business improved but is still not at historical levels. Customers include hospitality, leisure and corporate entities.

In Snackworks, biscuit revenue increased 7.3% (including volume growth of 1.3%) and snacks revenue increased 4.5% despite a drop in volumes.

I&J reported revenue growth of just 0.8%. Operating profit margin increased from 10.2% to 12.9%, with a favourable product mix and increased volumes in the abalone business.

I’ll touch on one more underlying business unit: Footwear and Apparel. Revenue fell just 1.1% despite an 11.5% drop in footwear volumes, which gives you a taste of inflation in this category. The volumes were hit by the civil unrest and other supply chain challenges.

AVI is in for a tough year unless the conflict in Ukraine is resolved quickly. Commodity prices are going through the roof, which is a major inflationary concern for the food businesses in AVI. Consumers will be under considerable pressure, which isn’t good news when trying to sell them biscuits (or upmarket shoes, for that matter).

Managing volumes, selling prices and ultimately gross margins will be the difference between success and failure this year. That’s no different to any other year; it’s just going to be much harder than usual in 2022.

Massmart has been releasing ugly announcements for so long that I’ve run out of puns. I’ve used Messmart quite often, along with references to the pink elephant in the room (Game). Their financial troubles have outlasted my creativity.

It’s hard to find positives in the story. One silver lining is that Massmart is the second largest retail website traffic generator in South Africa, so the group has made an effort to compete with Takealot. Massmart believes it has an opportunity to become the business-to-business and business-to-consumer omnichannel market leader.

Opportunities are great, but execution is what matters.

To be fair to Massmart, the riots were particularly terrible for the group in 2021. We all remember the shocking scenes on TV of the Game warehouse being looted. It says something for Game’s perception in the investment community that friends of mine joked that Game might be better off on a net basis from getting the insurance payout, since it may have struggled to sell the stock. People are incredibly bearish on Game’s prospects.

Total group sales decreased by 1.9% in 2021, with comparable store sales up 1.7%. This means that the store footprint decreased overall, as the group rationalised its operations and tried to steady the ship.

This needs to be viewed against the “other income” line which includes insurance proceeds related to the riot. This line increased by 280.9% to R1.1 billion. Group sales were R84.9 billion, so this would add another 1.3% to the sales line. It’s definitely not enough to make up for the real issues in the business.

Massmart Wholesale (mainly Makro) could only grow sales by 1.1%. Builders was the star with 7.1% growth. Unsurprisingly, Game was a disaster with sales down 8.7%. Game has 146 stores and 114 of them were updated into “Stores of Excellence” during the year – you can make up your own mind on how excellent they are.

It’s very difficult to manage gross margin when sales are under pressure, so the impact was amplified by a 191bps deterioration to 18.5%. A large part of this was driven by inventory write-downs in the riots, so the more sustainable view is a drop of 45bps to 19.9%. That’s still a rough result.

There’s some good news further down the income statement, with expenses down by 1.2%. It’s just nowhere near enough unfortunately, with trading profit down a whopping 83.3% to R195.4 million.

Below that line, there’s an impairment of over R1 billion, of which nearly R231 million is linked to the civil unrest and R507 million is linked to Game, which must be a swearword at Walmart by now. To add further insult to injury, there’s a foreign exchange loss of R178.5 million.

Here’s the much bigger problem: net interest expenses increased by 2.3% to R1.78 billion. That’s over 9x higher than trading profit, taking the net loss to an eye-watering R2.2 billion. This is largely due to lease expenses (and the crazy accounting of IFRS 16), so I must point out that interest-bearing borrowings (the type of debt that isn’t distorted by accounting rules) are “only” R6.5 billion.

Massmart’s headline loss increased from an already-terrible R924 million to a truly spectacular R1.5 billion.

If you’re wondering how things might look going forward, take note that liquor sales were prohibited for 110 days in this financial year, leading to lost sales of R1.8 billion and lost margin of R193 million. That would’ve nearly doubled trading profit, but wouldn’t have come close to achieving a net profit overall.

Other Covid-related costs came to R77.7 million. The TERS scheme and negotiated rental relief came to R62.2 million. This means that health and safety costs of the virus were largely passed on to government and landlords.

The store closures due to the unrest led to lost sales of R2.7 billion, with lost margin of R473 million.

Provided the deal goes ahead to sell Cambridge, Rhino and Massfresh to Shoprite (and I still have no idea why Shoprite is buying them), punters can look at continuing operations for a clue of what the performance might look like going forward. Those sales increased by 0.1%, so the story is hardly any better.

Capital expenditure in 2021 was nearly R1.4 billion. This is another challenge – retailers need to keep investing to stay relevant with consumers. When they are in deep trouble, trying to turn things around is extremely difficult.

Sales in the eight weeks to 20 February 2022 are up 1.7%, with comparable store sales up 5.1%. In continuing operations, those numbers are 3.6% and 6.6% respectively. That’s at least starting to sound respectable.

In a surprise to absolutely no one, there is no final dividend.

I continue to wonder how much patience Walmart will continue to have with Massmart. The share price is down nearly 27% this year.

The Foschini Group (or TFG – they stole my listing ticker before I became big enough to be a listed company!) is making a significant acquisition in South Africa, which is always great to see. A few years ago, JSE corporates could only bring themselves to invest offshore. After many of them took a beating in markets like Australia and the UK, they are now looking closer to home.

TFG is buying Tapestry Home Brands, a group which owns businesses that you will immediately recognise: Coricraft, Volpes, Dial-a-bed and The Bed Store. The sticker price is R2.35 billion.

Locally manufactured products account for 47% of sales, with manufacturing facilities in Cape Town, Johannesburg and Gqeberha. The group employs approximately 2,500 people.

Tapestry has around 175 stores across South Africa, Namibia and Botswana. The stores are organised into three business segments that operate on a decentralised basis, so there’s an entrepreneurial culture underneath all this.

The sellers are Westbrooke Investments (a name you might recognise from Magic Markets as monthly guests on our show), funds managed by private equity house Actis and the current and previous management of Tapestry. This was a classic private equity structure.

The rationale for TFG is clear: this brings new products and categories into the group. It also brings a significant local manufacturing and distribution base, which TFG may be able to plug into its other stores. TFG is working to bring its supply chain closer to home, which would be a significant competitive advantage if it can be delivered. Given the current geopolitical nightmare in the world, deglobalisation is the next big thing.

TFG has a well-developed credit model which will be useful in boosting sales in the Tapestry businesses. There’s also plenty of experience in online shopping channels, another useful way for the groups to work together.

After this acquisition, TFG will have nine home consumer brands and four vertically integrated factories producing mattresses, upholstered furniture, household textiles, duvets and pillows.

The deal price was calculated based on normalised earnings before interest, taxes, depreciation and amortisation (EBITDA) of R360.9 million for the year ended February 2022. The EV/EBITDA multiple is 6.51x, which is typical for a deal like this in the South African market.

If EBITDA for this period comes in below R342 million (i.e. more than 5% lower than target), then the price is adjusted downwards based on that multiple.

The net asset value at 28 February 2021 (note: not directly comparable to the period referenced above) was R115 million. By January 2022, this had ramped up to R209 million. EBITDA in the 2021 financial year was R264 million (including a Covid-related claim of R86 million) and profit after tax was R34 million.

In the 11 months to January 2022, EBITDA was R329 million and profit after tax was R175 million. This gives an idea of what needed to be achieved in February to get the full selling price.

The non-management sellers will get their money when the deal closes. The sellers who are also part of management will have a portion of their payment delayed until the first and second anniversary of the deal as a retention tool.

The major hurdle to still jump over is the Competition Commission, although an acquisition like this should be ok as TFG doesn’t operate in the categories it is acquiring. Other conditions precedent relate to the Takeover Regulation Panel, consent from the lessors etc. A period of seven months has been set to achieve these conditions.

As this is a Category 2 transaction, TFG shareholders will not be asked to vote on the deal.

Strategically, I think this is a sensible move. A quick look on TIKR shows that Foschini is trading on an EV/EBITDA multiple above 12x, so this is an earnings accretive transaction. Most of all, I’m just happy to see investment in local supply chains, a key source of jobs in a country that desperately needs them.