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Johannesburg - Lesser indebted customers and high food inflation are the main reasons why supermarket giant Shoprite will report significantly higher earnings for the year to end-June, said analysts.
Shoprite announced on Wednesday it expected earnings as well as headline earnings to have grown by 25% to 35%, compared to the corresponding period in 2008. It will release its full results on August 25.
Chris Gilmour of Absa Asset Management Private Clients attributed Shoprite's growth to the success of the group's U-Save format, aimed at lower income earners who don't have heavy interest-bearing debt.
Coronation Fund Managers' Quinton Ivan said high food inflation has generally assisted the top line of food retailers. According to a trading update of July 7, inflation at Shoprite amounted to 15.8%.
The two analysts also attributed the growth to the group's African operations, which they say are performing well.
Furthermore, the separation from Shoprite and repositioning of Checkers has proved to be a successful project, said Ivan.
"Checkers is now solely aimed at the more affluent LSM 8 to 10 consumer and has been gaining market share from competitors," he said.
Funeka Beja of Afena Capital noted that Shoprite's share price has outshone all its peers. "Shoprite's share price grew by 39.28% in the 12 months to June 2009. It actually outperformed all the other food stocks," she said.
"A 25% to 35% growth in headline earnings per share - it is higher than total turnover growth (24.5%) - suggests margin expansion and higher interest earnings," Beja said. "Last year, the group's operating profit margin was 4.9%. This year it's likely to be higher."
Shoprite's trading update came as Statistics SA reported that retail trade sales plunged 6.7% in June at 2008 constant prices, year-on-year.
However, defensive stocks such as food and pharmaceutical businesses are usually least affected affected by the decline, said Beja.
On Wednesday afternoon, Shoprite stocks were trading 0.41% lower at 5 811c per share.
- Fin24.com