Spar (SPP) – Tested on many fronts

SPP delivered disappointing FY22 results, with diluted HEPS down 2.9% and DPS more than halved to 400cps. Spar SA’s turnover growth was aided by a low base in liquor, yet, despite SPP being disproportionately impacted by the unrest in the prior year, it underperformed its main competitors even with the advantage of a lower base.

SPP SA’s market share losses accelerated after FY19, which could be due to the impact of the Covid-19 pandemic on franchisee finances. SPP SA has acquired 44 stores over the past five years, and the higher ECL provision could indicate that about 50 more stores may be in distress. SPP’s retail management capacity could be tested if these stores fail and SPP needs to take over the running of the stores.

Spar Ireland has made several acquisitions in recent years, which have supported its turnover growth. Its footprint of company-owned stores has doubled since 2014, which could increase capex requirements and its expense-to-sales ratio.

Spar Poland reported good turnover growth despite the loss of 58 retailers. Management moved the target date for SPP Poland reaching breakeven to FY24. We show three possible paths to breakeven and conclude that the turnover uplift and margin improvements required to reach breakeven are substantial and that there is a risk that this may not be achieved within the two-year timeframe.

Although SPP’s total gross debt was stable in rand terms, debt levels declined in local currencies in all its divisions. This highlights the vulnerability of SPP’s offshore debt strategy to unfavourable foreign exchange movements.