Mike Bosman appears to have an indomitable spirit. How else could he remain so upbeat after the past seven torrid months? But this is just as well. Indomitable is probably the attribute most needed to see the Spar Group through what is likely to be an extremely tough few years.
Of course, Bosman is hoping to relinquish his role as executive chair in the coming months with the planned appointment of a new CEO “hopefully in the next month or so”. But he will be remaining on as chair, a position he took up in mid-December when Graham O’Connor stepped down.
Since his urgent appointment as executive chair — which was deemed a necessary contravention of best governance practice — Bosman has been on a steep learning curve. The recently released interim results for the period to end-March demonstrated just how steep it was — considerably more precipitous than most investors and analysts had assumed.
Turnover was up a lower than expected 8%, to R72.9bn, and gross profit advanced a smidgen under 10%, to R8.8bn. But that’s about as good as it gets. Operating margins, that hypercritical measurement in the retail sector, slumped to 2.1% from 2.7% and headline earnings per share collapsed 30% to 447.9c. Inevitably the dividend was a casualty.
The really bad news behind those grim figures is that the South African business is struggling with a host of challenges. Back in 2014, when O’Connor decided to go on an international acquisition spree, the local operation was regarded as the profitable ballast that would support the other businesses as they were turned to account. Not any more.
And it certainly doesn’t help that none of the other businesses has been persuasively producing good results. Ireland is making profits, but it spends everything left over after paying the banks and the taxman on buying new businesses. This not only makes it a little difficult to know precisely how it is doing on a like-for-like basis, but it means steep debt levels are never reduced and South Africa never gets a dividend. That hasn’t been important up to now.
Spar had been talking about rolling out SAP software for enough years for most analysts to assume it was in the bag. It turns out so did management
Poland is even more nerve-racking. Certainly, well done to management for reducing the losses from R166m to R58m, which is tied into the substantial improvement in loyalty levels to 60%, from 48%. But as Bosman told analysts, this is not fast enough progress.
As for Switzerland, well, what is the point?
As independent analyst Syd Vianello tells the FM, “Spar is facing problems on several fronts”. So much so that it’s not clear how or when it will be able to resume dividend payments.
While Poland has improved, it is still making losses (R115m in the six months), Switzerland is barely in the black (with after-tax profits of R46m), Ireland churned out an after-tax profit of R270m and South Africa produced an unimpressive R652m after-tax profit.
In management’s defence, many of the difficulties were way beyond its control. Every country recorded substantial increases in inflation, which affected operating costs, as well as higher interest rates — this meant heftier finance costs for Ireland, Poland and Switzerland, which are carrying substantial debt. These conditions look to be here for some time.
And then there was the slump of the rand against the euro, zloty and Swiss franc. That accounted for much of the spike in the rand amounts in the group’s reporting. It also played a large role in the breach of the group’s leverage covenant with the banks.
However, finance director Mark Godfrey did say the breach, which was approved by the banks, was also attributable to the weak operating profits and lower than expected turnover across all markets. On the upside, it flattered the share’s NAV, taking it to R55.76 from R43.74, though that did nothing to prop up the share price.
But the really bad news — the part of the story that is entirely within management’s control — was the SAP software rollout disaster, which Bosman says cost the company R760m in sales and about R150m in earnings. And presumably a chunk of goodwill was lost, as independent retailers in the rollout area of KwaZulu-Natal were forced to rely on supplies from distribution centres in the Eastern Cape and Gauteng. Loyalty levels cratered to 20%, but are now back at 70%.
Spar had been talking about rolling out SAP for enough years for most analysts to assume it was in the bag. It turns out so did management. Bosman is remarkably phlegmatic about what he describes as a “brutal patch” for the independent retailers. “It started piecemeal a few years ago, and all agreed they were ready for the rollout,” he tells the FM, adding that there was evidently a lack of appreciation of what was involved.
Sasfin’s Alec Abraham tells the FM that Spar is not the first retailer or wholesaler to have problems with the generally complicated rollout of SAP systems. Massmart also struggled. “At least Spar paused and is assessing the situation before it moves on to its other distribution centres.”
Meanwhile, Bosman is keeping a close eye on things. Speaking to the FM from Sri Lanka, just days after the results presentation, he says the fulfilment rate is now up to 74%, adding: “That’s good, but nowhere near the 90s we’re used to.”
Abraham has some sympathy for the SAP debacle but says the company’s key competitive advantage of location is fading due to the prevalence of online shopping in urban areas. On this score, Spar has been considerably outmatched by competitors, particularly Shoprite.
“Management has to demonstrate that it can get around all the problems facing [the company],” Abraham tells the FM. On the international front he’s not too worried about Ireland and Switzerland, which he says are “washing their faces and covering the costs of their own debt obligations”. But the picture is quite different in Poland, where Spar South Africa has guaranteed €110m of its debt. That’s what it could cost if Spar opts to walk away, less whatever funds it might get in a sale — but recall that it was bought out of liquidation a few years ago. The alternative is to invest to grow, with or without a funding partner.
Bosman says a decision will be taken by the end of the 2023 financial year. It won’t be an easy one, given the lure of the potential opportunities in Poland, which is a fast-growing market and home to 88,000 independent retailers, many of whom would fit very nicely into Spar’s business model.
And for investors who think the rand is on a long-term downward trajectory, that must look very alluring indeed. Even the shopaholics running the Irish operation make it look enticing as they build up a euro-based business.
But all in all, it’s just as well Bosman is indomitable.
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