IT upgrade partly to blame for Shoprite earnings shocker

Retail giant Shoprite has in part blamed the implementation of an enterprise resource planning (ERP) system for its earnings shocker in the half-year ended 30 December 2018.

The group’s shares slumped the most since 1999 on Wednesday after it said first-half earnings dropped by as much as 26%, with South African food deflation and IT troubles compounding weakness in the rest of the continent.

Headline earnings per share declined between 16% and 26% to as little as R3.89, the Cape Town-based supermarket operator said in a statement after the market closed on Tuesday.

“Supply constraints stemming from industrial action and the deployment of a new ERP IT system resulted in lost sales in the period. Additional labour costs were incurred to ensure our supply chain remained operational and brought up to full efficiency over the festive season,” it said.

Shoprite has been implementing an ERP system in South Africa based on software from Germany’s SAP for the past few years.

“The group remains positive about its operational strength, customer support for its brands and continues to make progress on its longer term strategic priorities,” it told shareholders. “The transformational changes we made during the year-long migration to a new IT system were challenging, but the deployment has now been completed. January 2019 has seen the improved trading trend continue and we are confident of an improved second half as the impact of various once-offs continues to ease.”

Depressed environment

Shoprite has more than 2 500 stores throughout Africa, yet a considerable majority are in South Africa. That exposes the company to the depressed consumer environment in the country. which particularly affects its core lower-income customers.

Alongside food-price deflation and rising costs in essentials such as electricity and security, Shoprite struggled with the introduction of the new IT system and some industrial action.

There’s little sign of any economic improvement either, though the company insists it can rely on customer support for its brands.

In countries elsewhere in Africa, Shoprite’s problems aren’t new. A massive devaluation in the Angolan currency (and, to a lesser extent, in Zambia and Nigeria) has hurt conversion to the rand and driven up import costs. Meanwhile, rents in many African countries are linked to the US dollar.

The shares fell as much as 17%, the most since July 1999, and traded 12% lower at R157.37 as of 9.12am in Johannesburg.

That extended a January decline to 17%, and the stock is down 34% over the past 12 months, compared to a 10% retreat on the FTSE/JSE Africa Food & Drug Retailers Index.

“Shoprite’s high South African margin has been driven by a formula of low prices in ever-improving stores,” said Charles Allen, an analyst at Bloomberg Intelligence.

Yet “availability issues, caused by an IT upgrade and strike, have hurt revenue” and “competition has improved, meaning that the company will have to work harder to regain momentum”.

“Profitability has been affected by South African deflation and consumers under extreme pressure, as well as inflexible costs, many of which are fixed in dollars across other African countries,” said Alec Abraham, an analyst at Sasfin Securities in Johannesburg.  — Reported by John Bowker, (c) 2019 Bloomberg LP, with additional reporting (c) 2019 NewsCentral Media