Spar’s big battle

Spar has been struggling to contain expenses, which has resulted in the company’s earnings coming under pressure.

In June, Spar released its unaudited condensed consolidated interim financial results for the six months ended 31 March 2024.

Turnover for the continuing group operations, which consist of Southern Africa, Ireland, South West England, and Switzerland, increased by 7.9% to R77.2 billion.

The continuing group delivered an operating profit of R1.6 billion, a marginal improvement on the prior comparative period.

However, net finance costs negatively impacted profit before tax, which declined by 11.2%. Consequently, diluted headline earnings per share declined by 7.6% to 464.8 cents.

Despite the weaker-than-expected trading, Spar’s management was confident that the second half of the year would be better.

“The various cost-saving initiatives and improved situation at the KawZulu-Natal region will improve profitability going forward,” it said.

However, the company warned that the operating environment in South Africa continues to be challenging.

“Inflation, prolonged high interest rates, muted GDP growth and high unemployment continue to place consumers under pressure,” it said.

It was upbeat that its tiered private label approach was well-placed to offer better value for all shopping budgets.

“Agreeing on the target operating model, improving profitability and finalising the system modernisation rollout plan are key focus areas for the months ahead,” it said.

One of the retailer’s biggest challenges is containing costs, which have been growing faster than revenue.

Since 2019, Spar has increased its interim revenue by an annualised compounded growth rate of 7.4%.

This increased the interim revenue figure from R54 billion in 2019 to R77.2 billion reported in H1 2024.

Although revenue saw decent growth over this period, Spar has not been able to convert these increased revenues into profits.

Spar’s interim operating profit increased from R1.3 billion in 2019 to only R1.6 billion in the most recent release. It represents a compounded annualised growth rate (CAGR) of only 2.6%.

Even more alarmingly, Spar’s net profit has seen a general downward trend over the same period. It fell from R1 billion in 2019 to only R870 million in the most recent result.

This means that Spar’s total expenses have been growing at a faster rate than the retail group’s revenue. 

Since 2020, Spar’s revenue and cost of sales have been increasing consistently, leaving the group’s gross profit margin relatively constant with a slight improvement.

However, Spar’s operating expenses have increased much quicker than its revenue, resulting in operating profit margins that were lower than they were in 2020.

Despite the increase in revenue, operating profit has not changed much in absolute terms in the past four years.

However, the group’s debt has increased, causing interest expenses to rise by an annual compounded growth of just under 12% since 2020.

This combination has caused Spar’s bottom line to gradually be eroded.