Bad debt, low inflation may hit Spar

Johannesburg - As Spar[JSE:SPP] prepares to deliver interim results on Wednesday, analysts are wary of the effect bad debt and low food inflation may have on the franchise retailer.

However, experts predict the group will fare better than rival Pick n Pay, which had a torrid second half to end-February.

"I expect Spar's performance to be better than [that of] Pick n Pay, but not as good as Shoprite's interim result," said BoE Private Clients' equity analyst Sharnay Narsi.

"Remember that Spar results are to end-March 2010, and low food inflation therefore had a stronger impact. The reported 9.2% increase in sales to December is likely to have come under pressure since the beginning of the year."

Narsi said it would be interesting to note whether Spar has been able to maintain or improve volume growth. "Spar margins are very susceptible to changes in volume, as it is a distribution business that can really sweat assets if higher volumes pass through its distribution centres. I suspect gross margins have held up well, as the group is unlikely to have come under pressure from retail partners in the low inflationary environment."

Warren Buys, portfolio manager at Cadiz Asset Management, said: "I do think in general volume pick-up on food has been slower than most people have anticipated. Food inflation is surprisingly on the downside at the moment, especially for commodity-based products. I think this will be a drag on Spar's top line."

Narsi said: "Regarding franchise debt concerns, I do think there is a possibility for a negative surprise either in the form of higher bad debt or increased debtors if Spar has decided to help franchisees cope with working capital pressures, but I think the jury is still out on this issue.

"This has been the trend over the last two years given that banks were quite stubborn with credit extension, but maybe there is a bit more flexibility now. If there is a material increase in franchise debtors, it would be negative." 

When reporting for the 2009 financial year, Spar CEO Wayne Hook said the food chain had to raise its bad debt provision last year to help some of its struggling franchisees.