Just two years after taking over as CEO of Africa’s biggest grocer from long-serving Shoprite CEO Whitey Basson, Pieter Engelbrecht looks set to announce what one analyst described as the group’s worst-ever results, with profits for the six months ended-December expected to be down as much as 36%.

In a trading update released late on Tuesday, Shoprite warned shareholders that the group’s operations had been hit by a long list of negative factors, including low food inflation, temporary stock shortages, currency devaluations, lower gross margins and inflexible expense increases.

Basson led the company from 1979 when it comprised just eight stores, expanding its footprint into major economies on the African continent.

The group now has more than 2,840 stores in 14 countries. Engelbrecht, who had worked closely with Basson for several years, took over in January 2017.

Sasfin analyst Alec Abraham said the share price, which ahead of the trading statement was down more than 30% on its March 2018 peak, would be hit hard by the news.

"Coming from Shoprite, this warrants a little bit of panic," Abraham said. The results would be the worst reported by Shoprite "by a long shot".

He said the group’s operational update released earlier in January, which dealt only with sales, had given no indication of the extent of the difficulties.

"On the basis of the sales update I revised my earnings forecast and was expecting a single-digit fall, this is much worse than anything I’d expected," Abraham said.

Jean Pierre Verster, a portfolio manager at Fairtree Capital, said that talk of the tough trading environment was not unexpected as all of the retailers had been hit. "But we’ve come to expect more from Shoprite.

"These figures are horrible."

While Shoprite’s recent results have been hit by its exposure to Angola and Nigeria, which for years had made strong contributions to the bottom line and enhanced the group’s attraction as an African retail giant, the trading update points to major local problems.

Also unexpected from Shoprite was the long list of costs, including rentals, electricity, security and transport, that increased above the rate of sales growth.

At the 2018 annual general meeting some shareholders had raised concern about the group’s low returns on its hefty commitment to capital expenditure.

In the last six years Shoprite has spent R40bn on capital expenditure and during 2018 alone it committed R7bn to investment in centralised warehouse facilities and information systems.

Verster said the type of projects being undertaken had average useful lifespans measured in decades. (BusinessDay SA)

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