Be expenditure hits Shufersal profits

Shufersal Photo: Eyal Izhar

The Israeli supermarket chain's profit fell 36% in the fourth quarter due to the Be pharmacy chain's operating loss.

Israeli supermarket chain Shufersal Ltd. (TASE:SAE) today published its financial results for the fourth quarter and full year 2018. The company's results show that while its acquisition of the New Pharm drugstore chain, completed in late 2017 (the chain's name was changed to Be) increased Shufersal's revenue in the fourth quarter and the year as a whole, it had a negative impact on its profit.

Be's operating loss in the fourth quarter was NIS 13 million, dragging down Shuferal's fourth quarter operating profit and resulting in a 36% drop to NIS 49 million in its net profit. Be's losses in 2018 totaled NIS 29 million, while Shufersal's net profit during this period fell 4% to NIS 453 million.

Shufersal reported NIS 23 million in expenses for rebranding the Be chain, while Be's quarterly sales amounted to NIS 141 million in the fourth quarter and NIS 552 million in 2018 as a whole.

Shufersal estimated Be's share of the pharmacy market in Israel in 2018 at 3%. "We are happy with the pace of opening branches. We thought it would be a little more difficult," said Shufersal CEO Yitzchak Abercohen. "These 11 stores are only the beginning. We'll accelerate the opening of stores in 2019, with the average rate rising to 12-14 stores a year. We're optimistic about deployment. The plan is to reach over 11 stores with a NIS 1 billion turnover in the coming years."

Be's deployment, however, is still limited in comparison with its old rival, Super-Pharm. "The ratio is currently 1:4, so the differences are very great," Abercohen said.

In its reports, Shufersal states, "The pharmacy market in 2018 featured growing competition, among other things following the launching of the Be chain against Super-Pharm, and also by other competing retail chains, such as discount pharmacy chains and broader deployment of branches through purchases carried out online at sites in Israel and overseas."

Improvement in same-store sales.

Shufersal is Israel's largest supermarket chain in sales, with 360 branches: 285 supermarket branches and 73 Be branches (following the opening of 11 branches in 2018). The chain's branches cover a total of 533,000 square meters, and it has 15,650 employees.

Shufersal's revenue grew 8% to NIS 12.8 billion last year, and its fourth quarter revenue was up 6% to NIS 3.1 billion. Another positive sign in Shufersal's reports was same-store sales, which rose 3%, aided by the timing of the major Jewish fall holidays. Same-store sales were up 1.7% on the year, attributable mainly to growth in the food market.

The improvement in Shufersal's gross profit is attributable to better trade terms, higher market share for its private brand, its mix of bargains, streamlining at its logistics center, and the distribution chain and consolidation of Be's activity. This consolidation, however, also increased the chain's expenses, such as costs of launching a credit card, after Shufersal replaced the credit card company that issued cards to its customers and switched from Leumi Card to ICC-Cal. The chain's fourth quarter operating profit dropped 22% as a result of a lower operating profit margin, also reflected in net profit. The trend for 2018 as whole was similar, with higher gross profit, higher expenses, and lower operating profit.

"We will see an unusual contribution from the financial sector to the company's results in the coming year, and the Be chain's results will improve dramatically in 2020," Abercohen predicted.

Shufersal's share price responded to the reports with a 2-3% dip. The share price has not changed much this year, reflecting a NIS 6 billion market cap.

Price rises in the private brand

During 2018, Shufersal ceased to be a company with controlling shareholder, after Discount Investment Corporation (TASE: DISI) sold 16.5% of the chain's capital to investment institutions for NIS 850 million. Discount Investment, controlled by Eduardo Elsztain, is still the largest shareholder in Shufersal with 26% of its shares, worth NIS 1.6 billion. Together with its reports, Shufersal announced the distribution of a NIS 160 million dividend to its shareholders.

According to its report, Shufersal's private brand accounted for 24% of its sales, with sales totaling NIS 3 billion of 5,100 products, making it the fourth largest supplier in the Israeli retail market. Abercohen said in this context, "In the foreseeable future, we want to private brand sales to reach 30% of total sales." Shufersal reported that its proportion of online sales reached 13.6% in 2018.

Abercohen today confirmed for the first time that Shufersal had raised prices of its private brand in certain categories. "Other than essential prices hikes by suppliers of a very small number of specific items, such as sugar, rice, and paper, the private brand mostly did not raise prices. Only at the margins where it was unavoidable because of developments on global commodity exchanges did this happen," he explained.

Concerning future price rises, " Abercohen said, "As long as there are no surprises on global commodity exchanges, I see no reason to raise prices."

The cost of employing Abercohen was NIS 4.8 million, and the cost of the company's other four highest-paid executives was NIS 1.8-2.2 million each. Former Shufersal chairperson Israel Berman, who left his position last July, received NIS 860,000 for a 40% position.

Published by Globes, Israel business news - en.globes.co.il - on March 17, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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Shufersal Photo: Eyal Izhar
Shufersal Photo: Eyal Izhar
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