Sparkling earnings spur Spar to record high

SPAR'S share price hit a record high this week after earnings beat forecasts, helped mostly by new acquisitions.

It jumped 8.5% to R145 on Wednesday on the release of its results and helped buoy the food retailer index to its highest point this year. On Friday Spar rose 2% to close at R152.20.

The gross profit margin rose 20basis points to 8.3%, helped by increased levels of perishable products sold through the distribution network.

The BWG Group, which Spar bought during the period, trades at a higher gross profit margin than the South African business.

BWG Group is a food and wholesale distribution company in Ireland and England, servicing more than 1100 stores.

Ebrahim Moola, an analyst at Old Mutual Equities, said the jury was still out on the BWG acquisition. "It may have paid an attractive price, but the food retail market in the UK is mature and fiercely competitive. The German value retailers, Aldi and Lidl, have been taking significant market share from players like Tesco there."

Spar's profit after tax increased 13.3% to R1.3-billion. Headline earnings were up 12.8% to R1.4-billion and headline earnings a share jumped 12.5% to 781.8c.

Moola said Spar's wholesale turnover grew faster than its retail turnover (8.9% versus 7.8%), implying Spar franchisees (who are not obliged to buy from the g roup) are increasingly buying through the group's distribution network.

Moola said Spar was a quality business with some great defensive attributes; it had a robust wholesale business model and stable operating margins and was highly cash generative.

So is it better to invest in Spar or Shoprite?

Spar's operating profit margin is lower than Shoprite's. Spar sells goods to its franchisees. It only made money on the procurement and distribution of the product to the store, a wholesale margin, Moola said.

"Its franchisees make the retail margin. But Shoprite owns more of the value chain from distribution to the store, hence its margin includes a wholesale and retail component."

Spar's operating margin has been stable at 3.5% for the past 10 years while Shoprite's has grown to nearly 5.5%.