Spar (SPP) – A Growing List of Issues

SPP’s 1H23 results were disappointing, with diluted HEPS dropping by 30.2% y-y. The Spar SA division’s performance was undermined by complications in the SAP implementation at its largest distribution centre. Drawing on the experience of SAP implementations at other retailers, including that of Shoprite (SHP) in 2019, we contend that fixing the problems at SPP could be a protracted process. Unlike SHP, SPP’s senior leadership is less experienced and has to deal with several other issues, including underperforming businesses in Poland and Switzerland and reining in debt levels to within covenant limits. These distractions could dilute management’s attention and slow the resolution of the SAP implementation issues, in our view. Piloting in its biggest DC may have been a risky strategy, and testing the new system in the much smaller Lowveld DC would have been more prudent, in our view. We note various learnings from other SAP implementations which could explain the issues experienced by SPP.

The breach of the group’s leverage covenant confirmed our concerns about the rising debt levels at the company. Management are confident that the waivers will be extended after September and have ruled out a rights issue. They may explore other options including leveraging their property portfolio through sale and leaseback. However, we think this would effectively only shift the risk as it increases the operational leverage of the company.

There has been a significant loss of retail skills at Board level, and we are concerned that this lack of retail experience and the dilution of SPP’s institutional memory with the short tenure of the current Board may impact its turnaround efforts.