The SPAR Group Ltd (SPP) Q1 FY2026 Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us. Before we turn to trading, I'd like to personally address my situation and my decision to step down as Group CEO. After nearly 19 years with SPAR, including leading the business through an exceptionally complex reset period, I've taken the decision to step down for personal reasons. The last 5 years, in particular, have required extraordinary focus and intensity. While I've been deeply committed to the business, it's people and our retailers, the role has come at a significant personal cost. It's time for me to prioritize my family after a demanding chapter. There's full alignment between myself, the Board and the incoming leadership team. I want to say clearly that both Megan and Reeza are exceptional leaders. They've been integral to the portfolio simplification, balance sheet stabilization and the development of our margin recovery pathway. I've worked alongside them through this reset phase, and I have complete confidence in their ability to lead the next stage of disciplined execution. Over the next 3 months, I'll focus on supporting the stabilization of KZN, the optimization of our corporate store portfolio and undertake the structured handover, in particular, of key retailer relationships to Reeza. SPAR is entering a phase of execution, but the foundations are now strong. The business is in a good place to take on this execution phase. And with that, I'll hand over to Reeza.

Thank you. Thank you, Angelo. And let me start by acknowledging Angelo's contribution over nearly 2 decades. The structural work completed over the last 2 years provides a platform from which we will now execute. The strategic framework remains clear, strengthening Southern Africa performance, improving margin resilience, maintaining disciplined capital allocation and advancing balance sheet resilience. What changes now is execution intensity. We will be appointing a dedicated MD for Grocery and Liquor, and that will be in the next 2 months. So we will be moving fairly quickly on that. and the role will be based in Pinetown, which will be close to operations. And this will be an internal appointment. So currently, we have 3 candidates under consideration, who have a combined 100 years at SPAR. So they bring institutional knowledge, they bring operational capability and deep retailer relationships. So this will allow me to be based in Cape Town while still traveling extensively to Durban and Johannesburg and of course, to Ireland and Dublin in particular. So we operate a federated model. Our retailers are nationwide. Leadership must be nationally engaged and present across the network. And my responsibility is to ensure alignment, accountability and execution across all regions. To reinforce delivery, we are also looking to appoint a Chief Marketing Officer. There will be a renewed focus on a clearly defined competitive customer value proposition built around price competitiveness and improved price perception, differentiated and relevant range, a leading convenience offer supported by partnerships such as Uber, which has worked very well for us, consistent high-quality quality in-store execution. Omnichannel and IT will remain under Megan as CFO. And I'm very pleased that Megan has taken on the role as CFO. And these are core pillars in the margin recovery journey, particularly the SAP integration, data governance and, of course, cost discipline. So just turning to trading for the 18 weeks. We've just released a SENS regarding our trade for the 18 weeks ended 30th of January 2026. Group wholesale turnover was up 2.1%. Southern Africa grew 0.9%. Retail sales increased 1.7%. On a like-for-like basis, it was 1.9%. And then retailer loyalty in South Africa stands at 80.9% with the balance of the distribution network averaging approximately 84%. The environment remains highly competitive with sustained promotional intensity and momentum improved in the November to January period after a relatively soft October, which followed a very strong September as we closed the year out with our retailer rebates for 2025. Margins remained under pressure as guided. and the KZN underperformance was concentrated and it was operational. There were 2 primary drivers in the KZN underperformance, a volume-led overshoot, which compressed margin and logistics and warehousing inefficiencies affecting cost to serve. A detailed root cause review has been completed to unpack the inconsistent performance in KZN. We are now completing or implementing a 120-day stabilization plan based on the outcomes of the review and further details will be communicated at the interim results in June. Retailer loyalty in KZN has improved slightly to 71.5% year-to-date, although still below targeted levels. So this is a structured recovery with defined accountability and time lines. I'll now hand you over to Megan.

Thanks, Reeza, and good morning, everyone. From a financial perspective, our current margins reflect promotional intensity, cost inflation and investment in systems, transformation and SAP. We plan to reset our cost base, which includes looking at our distribution network and optimizing that, centralizing of our non-trade procurement, improved credit discipline across the group, strengthened commercial governance and looking at logistics productivity enhancements. Savings this year will materialize progressively and are weighted towards the second half. Our leverage remains aligned to our 1.5x objective, and there are no covenant concerns. On the disposal of AWG in Southwest England, our discussions have advanced and the transaction structure has been substantially agreed, subject to final documentation and customary approvals. No further impairments are currently expected nor are any cash injections anticipated. This will simplify the group and strengthen our capital allocation focus. We are also going to seek shareholder approval for a share repurchase authority at the AGM next week. The timing and quantum of the share repurchase will depend on our leverage trajectory, our cash generation and our trading stability. Operational execution remains our priority. Back to you, Reeza.

Thank you, Megan. So just in summary, the current margins reflect competitive intensity and the recovery process is underway in specific nodes. As KZN stabilizes, cost initiatives embed and volumes rebuild, margin recovery is expected to be gradual and weighted towards the second half. I'm confident in what lies ahead. The strategy is clear. It is unchanged. The leadership team is aligned. The operational levers are defined. And this next phase is about disciplined execution. And I'm confident with the team that we have on hand that we are ready for it. Zihle, we are ready to take questions.

Thank you, Reeza. First question, do you anticipate a revised time line for reaching the 3% margin versus that previously communicated?

We -- look, we recognize that the progress towards the 3% EBIT margin has been slower than planned, and we need to get our margin back to healthy sustainable levels. And just to be clear, there's also -- we communicated at year-end in terms of what those levers are. And there is absolute alignment internally about those levers and the quantums at hand and what we need to do to get there. But the dials need to be turned up more and faster. So we are 100% focused on improving margins going forward. And we're constantly reevaluating what we -- where we are and what we've communicated to the market, and we will do that again at the half year.

Thank you, Reeza. Next one, are operating margins in BWG holding up or under pressure at present?

BWG is the consistent performer in the group and operating margins have been holding up very well. As you can see, top line at a healthy 3%, which in that economy is good growth. And they've been really good about managing their margins and also keeping their costs under control.

Thank you, Reeza. Next one, what size of share buyback authority is the Board looking at?

I think we -- yes, it is in the AGM notice. So we were looking at 10% of our issued shares or 19.2 million of shares in issue. That's the authority that we're looking for.

Thanks Reeza. A question around KZN. The recovery seems to be struggling to gain traction. Given your involvement over the past year as CFO, how has your assessment of the SAP-related challenges evolved? And now as CEO, are there specific actions or levers you can prioritize to help stabilize and improve performance?

Yes. As I said earlier, I think the issue is less tech-related and system related and more on the processes around that. We specifically in this period in an effort to regain loyalty, the team pushed volumes. And we also incurred additional costs in executing against that. So it is process-related issues that we have to get back on track, and we can get it back on track with the right focus.

Thanks, Reeza. A question maybe for you, Megan. I see that Build it seems to have come under severe pressure. And I also see that SPAR Health was a strong performer. Can you give some color on this, please?

Sure. So from a Build it perspective, we did see pressure in the first quarter. We have seen that recovery since the first quarter. But what we have seen is the rain definitely affected trade. And then the other thing we did see, there was a slight dip in loyalty, but what we do find in Build it is that we have retailers who stock up and stock down and especially going into the Christmas period, they will often be selling off the stock that they have. So it's something that we're watching carefully. But -- from an operating margin perspective, Build it has been performing well and has adjusted their cost base relative to the top line growth. From a SPAR Health perspective, we've seen really good growth there and the execution of our strategy is playing out well. We have now got a wholesaler down in the Western Cape, which came online in the beginning of November. So that's also aided us in terms of how we distribute into the Western Cape and the loyalty that we get as a result from that and also top line. So SPAR Health is performing well, and we're seeing really good top line growth in that business.

Thank you, Meg. What level of -- apologies. Please indicate of gross profit in rand terms in SFL during the 18-week period.

I would like to steer away from any sort of comments around GP and operating margin. But with the -- with Black Friday and the push for volumes, as we've indicated in the trading update, margin levels were under pressure, and we'll communicate the full set of results at the half year.

Thanks, Reeza. Megan I will give this one to you also. Please talk to the implications of the sub timing rollout amendments in terms of execution risk, timing and costs.

Okay. So from a SAP perspective, we still remain within budget. There's no cost creep coming through on the project. We did change tech in terms of our strategy for our SAP implementation. The key thing for us is getting finance enablement across the group. This really unlocks a lot of opportunities in terms of efficiency. So that remains our focus this year. And during this financial year, we want to make sure that we unlock that. The next item would be drop shipment and management of credit from a drop shipment perspective. All these items enable us to centralize functions, which also creates efficiencies across the group, and that remains our focus.

Thank you, Meg. A couple of questions on this. I'll just read the one. Should management not prioritize paying down debt and further reducing interest expense before buying back shares?

I think -- I mean it's a fair comment. I think we have demonstrated that we can generate cash and deleverage. It is -- I mean, clearly, we need to stay within a particular range. We've targeted 1.5% -- sorry, 1.5x gearing level that we want to get to within SA. And I think once we're within that, I think -- and our CapEx plans are clear, I think buying back shares is a good way to generate returns for shareholders. So we're still of the view that, that is the case without compromising our balance sheet because we have worked very hard at getting our balance sheet in shape, and we certainly don't want to destabilize it unnecessarily.

Thanks, Reeza. You did cover it in your opening remarks, but given that I've had like 2 questions, maybe reiterate the around -- sorry, questions around you relocating, you and Megan relocating to KZN in order to effectively discharge your responsibilities, shouldn't that be the plan?

I think the -- look, we do -- I did say in the opening remarks, and I understand this can be optically a concern, but we are a federated model. We run 6 DCs around the country. We do just naturally travel quite a bit. I mean KZN is not the only region to which we travel. And then 30% of our profits, we actually generate out of Ireland as well. So -- and then I think with the appointment of a Grocery and Liquor executive who will be Pinetown based, that is an important addition to the team. And that MD being present and running that business will alleviate a lot of that, I wouldn't say pressure, but the time commitments from a group perspective. So I -- yes, this past year, I personally have done a lot of travel to KZN and it's been manageable. So I don't see that as an issue.

Okay. Thank you, Reeza. Can Reeza please explain the overshoot of volume comment in KZN, please?

I think the Look, we -- in KZN, we do have loyalty -- the loyalty in the region is lower than it has historically been at 71.5%. And clearly, we want to get loyalty levels up. I think the team planned for additional volumes at better prices to retailers. I think we have -- I think there was an overenthusiasm, if I can call it that, in executing on that particular plan and that resulted in some margin deterioration in the region.

Thank you, Reeza. Who will be driving the strategy of the company? Are there skills to deliver on the sub upgrades and the new operating model/formats and regain franchisee loyalty?

It's the executive team that will be driving the strategy. I mean we will -- we do have a strategy that is clear that we have communicated to you previously, which Angelo has put a lot of effort into it. There is no significant changes to that particular strategy. We want to stabilize the business, improve operations and efficiency and get back to the margins that we have historically delivered. And it's up to this executive team to actually deliver that in line with the strategy that we've set out.

Thanks, Reeza. Megan, another question around SAP. I think just again to provide clarity, the question is, it appears that rollout has changed. Is this no longer touching the DC environment at all?

Yes. I think we alluded to that in our November results that we said we had changed the rollout. We weren't going to go DC by DC. We rather wanted to roll out on the basis of putting in finance enablement, which effectively is your general ledger, AP, AR fixed assets and doing that across all 6 DCs. Once we do that, it means everyone is on a common system, a common set of chart of accounts, common data, and that enables a whole lot more from a group perspective and also derisks instead of doing a DC by DC. So that was a decision that was communicated last year.

Thanks, Meg. Can you provide more detail on the Black Friday promotional activity that seems to have disrupted not only the market, but the group's GP line. Has this translated into sustained footfall into January and February?

Look, it's -- I mean, from a top line perspective and the categories that we invested in, it certainly delivered to plan. The -- whether it translated into sustained footfall, look, volumes and retail is under pressure. And we have seen that. We've seen that with our competitors. We have seen that with the market in general, and we have seen low inflation and deflation in certain areas. But Black Friday has -- certainly from a top line perspective has delivered. And I think the increased footfall hopefully translates into something more sustainable. Angelo, I don't know if there's anything you want to add to that.

No. Reeza, I think it's notable that for the first time in a long time, our like-for-like volumes are competing with our biggest competitors. And so if you look at a like-for-like level, that our like-for-like sales at retail are now directly in between the Shoprite number of circa 1.9% and the Boxer number of around 2.3%. In the Southern African part of our business, our like-for-like number is 2.25% over the 4 months. And so I think that's good. It's also really assisted from a loyalty perspective. And so over 6 months, we've seen loyalty stabilize and slightly up over 6 months. So that's also a good story, but it has come at the cost of margin.

Question, what level of OpEx growth are you seeing? Maybe if not something you can share now where maybe are you seeing the most significant OpEx growth?

Look, again, not about kicking the can down the road, but we'll share more detail on items below the top line and the sales line. But it is fair to say that OpEx is growing ahead of sales and GP. And that's in part due to the investments that we have signaled that previously. We are obviously investing in SAP, in new HR systems, in new IT systems, and that's impacted OpEx growth. However, we are undertaking a few efficiency and cost optimization reviews starting with -- and let me emphasize that the cost issue is not -- except for KZN, it's not the DCs. The DCs are delivering according to plan. The cost is at central office and in the center, and we're going to be having a look at that. But also, we're looking at other initiatives to improve efficiency. The distribution network, we've referred to in the trading update, the non-trade procurement, centralization of certain functions like [ merch ] and AP and drop shipment. So there's quite a bit underway to extract further cost savings. Some will be delivered in the short term and some will be delivered over the medium term from a cost perspective.

Thank you, Reeza. What is the difference between the 6.1% Ireland growth and the 3.1% in local currency?

It's clearly the exchange rates. So that's in -- the 6.1% is in the rand and the 3.1% is in euro.

Yes. A question around what happened to your current Liquor MD that presented at Capital Markets Day last year? Thami.

Thami. I'm not sure what was happened to Thami, but Thami, I saw him on Friday, and he looked fine. So he's around running the business very enthusiastically and he's a big personality. So Thami is still around, yes.

Yes. Meg, maybe this one is for you. Is SPAR Health taking market share from other players in the market such as Clicks or Dis-Chem?

So our aim is to do that. And I think we've seen good growth in our health business. One of the things that we are focusing on now is wellness and personal care, and we're looking at how we grow that out, not only within the SPAR Health network, but I think also within our SPAR stores. It's a place where we under-index, and I think there's big opportunity for us there as well.

This one is for you, Angelo. What would you say would be the things you would highlight as positives and concerns that you are focused on and that you would hope the new leadership keeps in focus?

At a high level, I guess, the focus on SA and the Grocery and Liquor business, I think, is -- has to be -- has to remain the key focus for the business. We've spent 2 years cleaning the balance sheet and fixing what happened offshore. And now we can -- I'd encourage the leadership team to keep the focus on returning SA as the heart of the business. I think that technological transition that business needs to make to compete in the year now is very important. And so the speed and focus on delivering the ERP change, but also a number of other technology drivers in the business is key. And then most of all, I'd say that our business works well when retail fires. And so a focus on retail and a philosophy that together as a management team, I know Megan and Reeza and I have tried to instill in the business jointly, which is that we think retail first. I'd say those are probably the 3 biggest focus areas going forward.

Yes. Okay. Well, thanks. I know we have a hard stop now at 9:30. So if Reeza, Megan, if you have any closing comments, then we can wrap up the call.

Megan, do you want to go?

Yes. I think just a big thanks to Ang. He's really been a good steward of the SPAR brand. And over the last 2 years, it's really been great working with you. Hopefully, between Reeza and myself, we are going to continue the work that you started and make sure that we execute and focus on SPAR in Southern Africa and ensure that both retailers and shareholders and all our stakeholders benefit. Thanks.

Yes. And if I can echo that, it's -- Angelo has given his heart and soul to this business. And I think we've -- as a team, I think we've achieved a lot over the last -- well, I've only been around for a year and a bit, but I think Angelo in his 2 years has achieved a tremendous amount. And we -- and he's laid the foundations for us to take this forward and take this further. I think we have the team. We have a few additions that we want to make to the team, as I mentioned, the Grocery and Liquor MD and I think the Chief Marketing Officer role, which will -- I think those are 2 very important additions to the team that we'll hopefully execute on fairly quickly. And otherwise, we have fantastic retailers. We have a great brand. We have ZAR 140 billion business at retail, the second largest retailer in the -- retail business in the country. And I think there's a lot between that ZAR 140 billion and the margin that we are currently delivering. And I'm excited about working with this team and taking this forward. But thank you, Angelo, for your selfless contribution over the past year. I got to see this up close and personally, and it's been tremendous working with you. Thank you. Thank you, Zihle.

Thank you, Reeza. And I just want to say to everyone on the call, any questions we didn't get to, I'll collate and then I will send out responses over the course of the day. Thank you, everyone.

Thank you.

Thank you.

Thanks.