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Jimmy Moyaha: Today I learned that Shoprite, one of South Africa's leading retailers and one of my personal favorite companies, is actually one of the world's leading food retailers. Reported interim financial results for 6 months.
Once again, I joined the company's CEO, Pieter Engelbrecht, on the phone to look at these numbers and try to understand the company's performance. Good evening, Peter. I am always grateful for your help.
In terms of last year's numbers, sales increased by 17.5%. This was a very large number. In addition to that high base, this year sales increased by his 14.6%. what are you doing?
Pieter Engelbrecht: Well, we focus on the customer. We have a lot of data and use it wisely to make pricing and promotional decisions. Perhaps this number says it all for the past six months. [is that] At the point of sale, we immediately passed on R8.4 billion in savings to our customers. I don't think there is any other retailer that can produce such numbers.
Read: Shoprite achieves impressive half-year sales performance
Jimmy Moyaha: Savings of R8.4 billion? And this despite the fact that you were still managing a figure of around R12 billion? We are once again compiling financial information. We had a brief discussion about that earlier. From a cash flow perspective, he generated about R12.4 billion in cash in his first six months. That's a very impressive number for any company over a 12-month period, but they achieved it in six months.
Pieter Engelbrecht: yes. This business is very cash-generating. Our cash conversion ratio is approximately 122% and our debt is modest. This is something that has hit some companies pretty hard over the past year. Because interest rates have risen rapidly, any extra debt on your balance sheet will take a big hit.
In our case, the debt level is very low, but still the interest accrued over six months is about R200 million.
So you can imagine how that has affected some companies that have debt on their balance sheets.
Jimmy Moyaha: At this stage, Peter, it is very difficult not to compare with our peers in the market. I say that because we've seen companies like Spar experience challenges with SAP deployments. We've seen companies like Pick n Pay currently raising equity and looking at things like unbundling.
Listen: Spar hasn't cleared the SAP hurdle yet
But if you look at the numbers and, as you mentioned, the debt that Shoprite has, it has a debt of about R6.6 billion, which is less than Pick n Pay's debt of about R7.2 billion . However, it has ample free cash flow of approximately R9.5 billion. At the moment, Pick n Pay has enough free cash flow to cover its market capitalization. That's a very telling number. First, if possible, why not consider acquiring Pick n Pay?
Read: Pick n Pay plan R4bn rights issue, discounter Boxer lists
Pieter Engelbrecht: If possible, I would rather save the company than lose it. I don't think it's a good thing that South Africa doesn't save the company. But they have a plan and are announcing it now. So let's see how this goes.
Jimmy Moyaha: Yes, let's see how it goes.we know sean summers [PnP CEO] We wish them every success.
Read: Pick n Pay chooses nuclear option in Boxer listing
But let's look back at Shoprite's numbers. Are you planning to unbundle anything? Do you have units?there's really no need [do so] From a business perspective, we don't think there's much to worry about at this stage as it's returning enough value to shareholders. But is it in your head to say, “Maybe I can unlock one or two things, or maybe I can just list them''? One or two businesses separately Do you do it?
Pieter Engelbrecht: not now. Not now. I don't think any of them are really meaningful enough to run on their own. For example, it's not always that simple to completely separate Checkers from Shoprite and list them separately. That requires some work.
I don't think that is necessary at this stage. Because one of the things that's very clear in this business is how clear we are in terms of what customer profile and which customers we serve by brand. Usave knows exactly what it does, Shoprite does the same, and so does Checkers.
And the current medium-term goal for Checkers is to achieve a formal market share of 15%. Currently, it has reached 15.2%, so I think there is still room for growth.
There is also internal organic growth. This morning I identified seven categories that are below average market share. So just getting this to average actually creates a huge organic growth opportunity.
And we've now spent years investing capital into data and technology-driven products such as artificial intelligence, pricing tools…
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It's impressive that it can do these things. For example, this tool can perform 400 million calculations in 30 minutes. This is world class.
Our personalization tools issued 454 million unique personalized offers in six months. We store 12 petabytes of data.
We have Extra Savings data for 29 million customers, with over 5,000 data points for each customer.
So all this creates great opportunities for us. I was able to replatform my Sixty60. We're busy with that right now. We have some more news.
Read: Can anyone catch Checkers Sixty60? (Hint: No)
And then there are financial services. We could also rewrite that platform. Therefore, we have not been able to launch new value-added service products there in recent years. Now you can do it again. As you can hear, the list is long. Therefore, the company plans to spend R8.5 billion on capital investment this year.
Jimmy Moyaha: Clearly, there are no signs of slowing down. Peter, let's look at your environment. Many competitors find this market very difficult. I'd love to hear your thoughts on that, but also as a retailer and the fact that you're sitting in the market. The space you're sitting in has a lot of different types of structures and models, and franchising is a big part of that. How do you see this from a margin standpoint, from a consumer standpoint, and how do you see that reflected in franchisees and their performance and so on?
Pieter Engelbrecht: Yes, I think I noticed something. There is no doubt that the franchise model in the retail industry is currently under a lot of pressure due to pressure on profit margins.
This industry is so competitive and so efficient that the fight for clicks is so intense that the efficiencies gained, even with all the other challenges, are a huge drag on margins. It puts a lot of pressure on the level. Such a model can generate one in which there is sufficient margin for the franchisee and franchisor.
Franchisees are therefore finding it increasingly difficult to generate enough cash to repay loans and the money they have had to pay for the franchise.
The franchise fee itself is another cash flow factor. So if you look at our OK Foods brand, which is our franchise business, you'll see that we've had high double-digit sales growth, but our revenue from a franchise fee perspective is in the single digits. The most affordable price ever. That's there. So if it's already in your location, it creates another problem for the franchisor.
Jimmy Moyaha: Peter, can we just think a little bit about the debt that's within the business? As I mentioned earlier, obviously this business has very manageable debt. Everything is conservative for the business and strategically he is looking to deploy an R8 billion capital investment. There's something that wasn't in the previous financial statements that we talked about, and that's that Nigerian Treasury Bills have been added to this area.
Read: Shoprite executives will stare at this one number in disbelief
I bring it up precisely because the situation in Nigeria is very interesting for a company like MTN. MTN was operating in that sector with consistent concerns surrounding the devaluation of the Naira and its tax implications in that regard. Obviously, at this stage, on the balance sheet he looks like a fairly small amount of R26 million. But what do you think about doing business in Nigeria and other continents?
Pieter Engelbrecht: We left Nigeria and only four shopping centers remained. I mentioned three shopping centers earlier, but there are actually four shopping centers that we currently own. Fortunately, we were able to repatriate all the money we had based on the sales contract. There is still about two years left on the service agreement, which will provide some expertise and systems to the purchaser of the Nigerian business.
What about Treasury Bills? In fact, about R1 billion is in Angola and will soon reach maturity. There is no guarantee that dollar-linked Treasury securities previously held as hedges will be available again.
So if you can't repatriate that money, there could probably be some exposure.
Jimmy Moyaha: Well, there's certainly more to look forward to in the next conversation than the surprising results. But I think I'll leave it at that for now, Peter. I am always grateful for your help. That person was Pieter Engelbrecht, CEO of Shoprite, who talked about the company's performance for the first half of the year ending December 2023.
