Spar feels the pain

Retail giant Spar warned that its upcoming interim results could be significantly lower than the previous year as it battles cost increases and IT issues.

Spar released a trading statement for the six months through May 2024, which revealed that the company’s earnings per share (EPS) are expected to be between 426.7 cents per share and 475.2 cents per share.

This translates to a net profit of between R821.83 million and R915.25 million for the six-month period, a decline of between 2% to 12% from the prior year’s R933.93 million

The retailer said the following factors impacted its earnings from continuing operations –

• Operating costs have been well managed. However, cost increases slightly exceeded lower-than-expected turnover growth.
• The ongoing IT system issues at Spar’s KwaZulu-Natal distribution centre resulted in lost gross margin, impacting its profitability in South Africa/
• Prolonged high interest rates have caused a significant increase in group net finance costs.

The retailer’s IT issues are related to the botched implementation of a new SAP software system at its KwaZulu-Natal distribution centre.

This transition caused massive headaches for the retailer and cost it an estimated R1.4 billion in lost sales over the past financial year. 

Due to the issues above, Spar expects its earnings from continuing operations to be within the ranges below –

Spar also gave an overview of its performance with discontinued operations included.

Earlier this year, Spar announced that it plans to cut debt and focus on its home market – South Africa – after exiting Poland this year. 

The retailer has been in talks to restructure its obligations and expects that withdrawing from the loss-making Polish unit will free up about R500 million of earnings a year.

Spar has R10 billion of debt – largely euro-denominated – with about R250 million due this year. 

“What we should be doing as all corporates, and Spar hasn’t been great at this in the past, is looking at our capital-allocation policy and making sure that is well thought through, particularly when you are funding expansion,” CEO Angelo Swartz told reporters in March this year.

The exit from its smallest market will help the retailer focus on South Africa, which accounts for more than 60% of its revenue.

Spar needs to take on rivals, including Shoprite and Pick n Pay, which are transforming their food business into well-defined premium and discount units – a strategy it currently lacks. 

“We have found ourselves at a crossroads,” the CEO said.

With its discontinued operations included, Spar expects its earnings to be within the following ranges –

Spar’s results are expected to be published on Wednesday, 12 June 2024. 

n terms of the International Financial Reporting Standards, Spar Poland is classified as a discontinued operation and has been reported as a disposal group held for sale from 1 December 2023. 

As part of the process of exiting this market, the evaluation of Spar Poland has resulted in a material impairment of the assets held for sale in the Polish disposal group.