Weekly Stocktake

08 September 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Shoprite: Fuel for Thought

Shoprite, the grocery retailer, has seen a consistent rise in market share in recent years. The latest results for 2023 demonstrate the success of their expansion efforts. Sales for the Shoprite group in 2023 increased by 17.1%, reaching a total revenue of R219.5 billion. Despite a high inflationary environment, Shoprite’s gross profit also saw a notable rise, reaching R51.7 billion for the year. However, the overall profit for the year saw a more modest increase of 2.8% to R5.9 billion, mainly attributed to diesel costs incurred during loadshedding and delays in finalising the acquisition from Makro.

Shoprite’s results provide valuable insights into the true state of the economy. Through their Xtra Savings loyalty program, Shoprite gathers extensive data, boasting 10.6 million participants in the Checkers program and 17.2 million in the Shoprite program. This enables Shoprite to gain a thorough understanding of individual buying habits and their evolution over time. Given the challenging economic conditions, consumers have been actively seeking better prices. Shoprite has addressed this by offering cost-effective bundled deals to consumers.

Upon the release of the results, a notable focal point was the diesel cost for Shoprite’s group, amounting to R1.3 billion for the year. This marks a significant increase from the R0.2 billion spent the previous year. Retailers generally operate on narrow profit margins, with Shoprite’s net margin standing at 2.7% for the year. Retailers contend with the dual-edged impact of operational leverage. Efficiency improvements in their operations have an amplified effect on net profit in relative terms. Conversely, factors like the increase in diesel costs have a substantial negative impact. The diesel costs shaved 18% off Shoprite’s potential profits.

During the earnings call, there was limited discussion regarding plans for the implementation of long-term power solutions, such as solar. One possible reason could be that Shoprite leases the properties it utilizes from third parties, like shopping malls. Thus, negotiating lease agreements with property owners may be the stumbling block.

At Lunar Capital, we like Shoprite. We believe that their recent results reflect positively on their ability to engage with customers across various income brackets. Their emphasis on expansion, coupled with their efficient central distribution model, allows them to maintain competitive pricing for consumers.

Connect with us on social media:

1 September 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Lululemon: Stretching Legs Internationally

Last week, Lululemon released their Q2 2023 results. Despite the slowdown in consumer spending due to the tough economic environment worldwide, Lululemon increased their revenue by 18% compared to the same period last year. For the quarter, sales in the US accounted for 64% of total sales. The gross margin and net income margin for Lululemon came in at 58.8% and 15.4%, respectively. Lululemon’s price to earnings ratio closed at 52.5 on Friday. This is still quite a high valuation.

Lululemon is an athleisure retailer and has a more established presence in the US compared to other parts of the world. However, their growth outside the US is much higher at 52% versus 11% in the US. The international sales surge was primarily fuelled by a notable revenue increase in China, which witnessed a 61% growth rate. China currently boasts the second-largest number of Lululemon stores, totalling 126 as of the end of July 2023. These stores in China tend to be smaller, and the company offers its products at lower prices in response to the smaller average wallet size of customers in the region. Consequently, the average revenue per store in China is lower, currently standing at $2.2 million per a store for the quarter, compared to the US, where the average is $3.9 million.

The stores serve as essential platforms for Lululemon to showcase their products and create unique user experiences for customers. Notably their direct-to-consumer segment has become increasingly significant, accounting for 40% of their total sales. Revenue derived from this segment increased by 15% compared to the same quarter last year, while revenue from their physical stores grew by 21%. The operating income margin for the direct-to-consumer segment is higher at 42%, whereas the stores segment has an operating income margin of 30%.

Lululemon operates in a highly competitive landscape, facing rivals such as Nike and other legacy luxury fashion companies such as Louis Vuitton (LVMH). Both Nike and LVMH boast well-established positions and robust balance sheets. Nevertheless, Lululemon’s relatively focused product line-up provides them with the potential to expand into diverse product categories. The barriers to entry in the retail world are comparatively lower than in other industries, meaning new potential competitors are coming into the market every day. Despite these challenges, Lululemon maintains a dedicated and loyal customer base. Customers repeatedly return to purchase their products due to the consistent quality they offer.

Lululemon is held in the Lunar BCI Worldwide Flexible Fund. Lululemon and LVMH are held by Lunar Capital’s Offshore Portfolio Clients.

Connect with us on social media:

25 August 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Nvidia: Where to from Here?

Nvidia released the most anticipated results of the earnings season last week. Since the beginning of the year, Nvidia’s stock price has increased over 220% which resulted in their market capitalisation reaching $1.1 trillion by Friday last week. During the year, the market became ever-more optimistic about Nvidia. For the recent quarter, revenue increased by 101% to $13.5 billion compared to the same quarter last year, with the gross profit margin reaching 70%. Nvidia’s quarterly net profit increased by 843% to $6.18 billion.

The primary cause behind these results largely stemmed from Nvidia’s sales of Graphic Processing Units (GPUs) used in AI (Artificial Intelligence) data centres. The main buyers of these products include Alphabet, Microsoft, and Amazon; all of which already had extensive data centre infrastructures. The most sort after chip for AI infrastructure is Nvidia’s H100 chip, which costs around $40,000. Since ChatGPT’s debut last year, companies have been adjusting their budgets to accommodate AI expenditure. These tech companies have been allocating substantial resources to acquire these chips so that they can try get ahead in the AI race.

Although Nvidia performed strongly this quarter, there are concerns about the sustainability of these results, and the strategies that companies will implement to provide AI services. Microsoft, who owns a stake in OpenAI (the creators of ChatGPT) have recently incorporated Large Language Models (LLMs) in some of their products such as Office365. In terms of hard numbers, the long-term implications of this implementation still remains unclear. Investors will be looking for concrete returns on investment on AI spending. Without adequate returns, AI infrastructure spending will reduce, impacting the share prices of companies like Nvidia.

Nvidia, Microsoft and Amazon are held in the Lunar BCI Worldwide Flexible Fund. They are also held by Lunar Capital’s Offshore Portfolio Clients.

Connect with us on social media: