Declining Footfall And European Losses Will Squeeze Retail Margins

Key Takeaways

• Dependence on traditional formats and underinvestment in technology heighten risks to competitiveness, operational efficiency, and long-term earnings quality.
  
• Structural challenges in international operations and margin compression from discount competition threaten profitability and potential for sustainable growth.
  
• Strategic focus on core markets, operational efficiencies, digital expansion, and a strong balance sheet position SPAR Group for sustained margin growth and enhanced shareholder value.

Catalysts

Engages in the wholesale and distribution of goods and services to grocery stores and other group retail outlets in South Africa and internationally.

• As the global shift to online and discount retail accelerates, SPAR Group is at risk of sustained declines in store footfall and market share, especially given their dependence on traditional suburban and rural supermarket formats and mid-tier positioning. This will likely lead to ongoing revenue stagnation and pressure on same-store sales growth.
  
• Continued underperformance in key geographies, such as repeated operational losses and impairments in European divisions (Switzerland, UK, previously Poland), indicate structural challenges in scaling internationally. The group's forced disposals and write-downs diminish profit streams and erode group-wide earnings potential over time.
  
• Rising competition from international retail giants and aggressive discount-oriented formats is driving price wars, compressing SPAR's margins. This intensifying landscape is being exacerbated by local cost of living crises and consumer migration towards deep discounters in both Southern Africa and Ireland-significantly threatening gross margin and overall profitability.
  
• Persistent underinvestment in transformative IT and supply chain modernisation, combined with recent disruptions from SAP rollouts, limit SPAR's ability to unlock operational efficiencies and cost containment. This technical lag increases vulnerability to cyberattacks (as seen in Switzerland) and reduces the potential for future net margin improvement and sustainable earnings growth.
  
• The group's heavy reliance on a franchise and voluntary trading model hinders their direct control over store standards, pricing, and rapid format adaptation. As secular shifts in consumer preferences towards convenience, technology-driven experiences, and fresh retail models accelerate, SPAR faces long-term risk of brand erosion, further variability in revenue streams, and ultimately weaker earnings quality.

SPAR Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SPAR Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SPAR Group's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.0% today to 1.5% in 3 years time.
• The bearish analysts expect earnings to reach ZAR 2.3 billion (and earnings per share of ZAR 12.32) by about August 2028, up from ZAR 1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.6x on those 2028 earnings, up from 13.1x today. This future PE is lower than the current PE for the ZA Consumer Retailing industry at 20.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.64%, as per the Simply Wall St company report.

SPAR Group Future Earnings Per Share Growth

Risks

• The company has demonstrated a consistent ability to expand operating profit and gross margin even amid weak revenue growth, highlighting strong cost discipline, effective procurement, and optimization strategies that could protect or even expand net margins going forward.
  
• Strategic divestments from underperforming international operations such as Poland, Switzerland, and the UK allow SPAR Group to focus capital and management bandwidth on core, higher-return markets (South Africa and Ireland), which strengthens long-term earnings potential and reduces volatility in group earnings.
  
• Early adoption and scaling of digital initiatives like SPAR2U and the partnership with Uber Eats support the long-term secular trend toward e-commerce and convenience shopping, opening up new revenue streams and supporting topline growth even as traditional brick-and-mortar retail growth slows.
  
• Investments in supply chain modernization, notably the SAP rollout, and the ongoing emphasis on private label expansion and procurement efficiency are already contributing to margin gains and are positioned to further enhance operating efficiencies, cash generation, and margins as rollout accelerates.
  
• The group's solid balance sheet, proactive debt restructuring, and strong cash generation position it to resume dividends and reinvest for sustainable growth, which could drive higher shareholder returns through improved earnings and capital allocation.

Valuation

• The assumed bearish price target for SPAR Group is ZAR111.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SPAR Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR171.0, and the most bearish reporting a price target of just ZAR111.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ZAR152.4 billion, earnings will come to ZAR2.3 billion, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 18.6%.
  
• Given the current share price of ZAR106.59, the bearish analyst price target of ZAR111.0 is 4.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.