The Finance Ghost: The retail lowdown on Lewis, Spar, Pick n Pay and Dis-Chem
There was a flurry of corporate activity in the past week as companies with February and March year-ends looked to get results out before the end of the month. Many companies manage to get results out within two months of the end of the reporting period, with others using the full three months that they are allowed by the JSE.
Amongst all the noise, there were several retailers that released important results. As a major source of employment in South Africa and with businesses that everyone can relate to as you can easily visit the stores yourself, this sector is always deserving of attention.
Lewis: the pick of the litter
The narrative around furniture group Lewis is nothing like it used to be. For years, this was a story of tepid growth and a focus on cost control, with a capital allocation strategy that took full advantage of the benefits of share buybacks. Now, Lewis is behaving like a growth stock with double-digit revenue growth and a colossal jump in Heps of 60.3% for the year ended March 2025. Such has been the extent of share price growth that they didn't do any share buybacks at all in the second half of the financial year!
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Can they keep it up? This is the question on everyone's lips. Somehow, they've managed to boost credit sales (up 12.1% versus cash sales up 3.4%) without sacrificing the quality of the debtors' book. This is a holy grail outcome, as retailers that sell on credit must always consider the benefit of additional sales against the risk of credit losses.
So far, so good at Lewis. The market is still wary of how sustainable this growth path is, so investors will be paying a great deal of focus to the next interim period.
Spar retreats from Europe – well, mostly
With Spar having been through such a terrible time in recent years, it was always unlikely that the pain would end with the disposal of the business in Poland. Things got so bad there that Spar essentially paid someone to take that asset away, with the group incurring debt to recapitalise the business in Poland before selling it for next to nothing. It's the equivalent of begging someone to arrive with a trailer to drag your broken old car off your lawn.
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To add to the headaches, the business in Switzerland had been showing some worrying signs for a while, as food is so expensive in that country that Swiss residents literally cross the border to buy their groceries instead of going to their local retailers like Spar. Risks like these are extremely hard for South Africans to foresee, which is why it's advisable to stick to familiar markets rather than doing business somewhere completely different. Unlike in the case of Poland where they waited until the very end to remove that tumour from the group, Spar has decided to sell the Swiss business. They are also letting go of AWG in southwest England, which came as a surprise as there weren't any obvious concerns around that business.
This leaves them with only the businesses in Southern Africa and Ireland going forwards. Of course, there's a difference between simply deciding to sell something and actually getting it sold, so it will be a while until the group is so clean and simple. In the meantime, investors have to suffer through diluted Heps from total operations dropping by between -24% and -34% for the 26 weeks to 28 March 2025. If you look at only the continuing operations, it should be between 0% and -15% lower for the period – still a poor outcome.
They have a lot of fixing to do at Spar.
Pick n Pay is a reminder that turnarounds are hard
Speaking of fixing, there's still a long way to go at Pick n Pay. In fact, with the results for the 53 weeks to 2 March 2025 now out in the wild, the group has noted that they only expect their core Pick n Pay segment to break even by 2028. CEO Sean Summers has agreed to extend his contract until then to help drive that outcome.
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This leaves the group in a situation where the controlling stake in Boxer is doing the heavy lifting, with the plan being to stem the bleeding in Pick n Pay as quickly as they can. There are at last some encouraging signs, like an uptick in like-for-like sales, but Pick n Pay will have to fight every step of the way in a market that is a bloodbath of competition.
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If you dig into the underlying earnings or read the company announcements, just be cautious of getting excited about the trading profit line. Due to silly accounting rules, lease costs (which are obviously substantial for retailers) are actually recognised in net finance costs, which come in below trading profit. In other words, trading profit ignores lease costs, so it's a very flattering view of profitability. This is why Pick n Pay clarifies that their breakeven goal for 2028 is based on trading profit net of lease costs, which is the correct way to look at things.
Dis-Chem keeps delivering – but did the market want more?
With Dis-Chem's share price closing 6.3% lower on Friday after the release of results for the year ended 28 February 2025, you would be forgiven for thinking that the numbers were weak. Instead, we find Heps growth of 20% and a similar increase in the total dividend for the year. Sure, Dis-Chem is now on a demanding Price:Earnings (P:E) ratio of 24.4x based on latest numbers, but could the market really have been expecting so much more than 20% growth in earnings?
In such a case where the share price move isn't easily explained by the earnings, it's best to skip to the outlook section of the announcement to see if there are any clues there. Dis-Chem notes a constrained consumer environment, but we are hearing that story everywhere and it's not exactly anything new. Helpfully, they've also given a sales update for 1 March to 27 May (i.e. about the first quarter of the new financial year) that reflects 8.6% growth in group revenue. This is even better than the 8% full-year growth that they just reported! Comparable pharmacy store revenue has accelerated from 4.1% for FY25 to 4.6% for these past few months. Perhaps the worry was around growth in wholesale revenue to external customers, which slowed down significantly from 22.1% to 13.6%. Still, that really shouldn't be enough to drive a 6.3% drop in the share price.
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This share price dip comes after a strong 30-day performance in the market, so it may be due to profit-taking by punters in response to earnings. Regardless, the underlying business is strong and Dis-Chem has continued to deliver for investors despite the pressure on consumer spending. As local retail businesses go, this is one of the best. DM
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