Poor consumer sentiment hinders Cargills 1Q

Weak consumer sentiments hit Cargills Ceylon PLC as the country’s largest privately-owned retailer saw very little growth in the basket values of the shoppers during the quarter ended June 30, 2018.
Cargills group reported Rs.24.5 billion revenues for the April-June period (1Q18), up seven percent over year-on-year (YoY) but squeeze in margins was so intense that the gross profit remained virtually unchanged.

The retail network with 357 outlets by the end of its first financial quarter reported a gross profit of Rs.2.78 billion. The group, which owns restaurants under franchise and a strong fast moving consumer goods (FMCG) business, saw its operating profit declining by seven percent YoY to Rs.1.48 billion.

Cargills said revenue growth in its retail business was dampened due to soft consumer environment, which exerted pressure on consumer spending power.

The group’s retail business reported revenues of Rs.19.5 billion, down seven percent YoY but the operating profit declined sharply by 25 percent YoY to Rs.630.8 million.

“Overall, basket growth was minimal vis-a-vis the corresponding quarter, and transactions growth was the primary factor driving top line growth in the quarter,” Cargills said in an earnings review.

Cargills already enjoys the highest reach in terms of the number of stores spread across the island compared to its rivals. However, the competition is expected to intensify and put exiting retailers’ margins further under pressure with new entrants. According to the market research firm Nielsen, modern trade penetration remains low with only 12-15 percent of FMCG sales generated by modern grocery retail, relatively low in comparison with regional peers.

In August, consumer durables juggernaut, Softlogic Holdings PLC said it would enter the retail sector as early as in the fourth quarter making the total number of players to seven including the State-owned Sathosa.

Meanwhile, Cargills group’s FMCG business, which produces Kotmale branded dairy products, frozen foods and confectioneries performed better during the quarter under review. The revenues rose by 7.4 percent YoY to Rs.5.8 billion while the operating profit rose by 7.5 percent YoY to Rs.662.7 million. Group’s restaurants business, which holds franchise rights for KFC and TGI Friday’s, reported Rs.918.7 million in revenues, up 5.5 percent YoY and the operating profit was up 30 percent YoY to Rs.108.1 million.

Accordingly, Cargills group reported earnings of Rs.756 million or Rs.3.26 a share for the quarter under review compared to Rs.751 million or Rs.3.35 a share reported for the corresponding period, last year.

The earnings were buttressed by the lower finance cost and benign effective tax rate.
As of June 30, 2018, C.T. Holdings PLC held 70.2 percent stake in Cargills while Employees’ Provident Fund held 3.28 percent stake being the third largest shareholder of the company.