Massmart has written down the value of its assets by half-a-billion rand, it said in a trading update that showed another six months of losses and continued struggles at its flagship Game chain.
The company, majority owned by the world’s largest grocer, Walmart, is undergoing a turnaround strategy after two annual losses, both exceeding R1bn. Massmart’s update for the half-year to June 27 shows that hardware chain Builders is experiencing double-digit growth, but a turnaround at Game is yet to gain traction.
Massmart expects its first-half losses to be between R745m and R836m, slightly improved from R907.7m a year ago, after taking a R570m writedown charge on Game. The performance excludes the Cambridge and Rhino foods businesses, which are up for sale.
The retailer’s share price closed 9.14% lower on Friday, its worst one-day drop since late March 2020, revealing that investors were not pleased by what All Weather Capital analyst Chris Reddy called a “disappointing” trading update.
Reddy said he expects further impairments in the next update due to looting and damage in the KwaZulu-Natal riots, with the retailer reporting that insurance would not cover all the losses.
Massmart, which has large warehouses in KwaZulu-Natal, the heart of the civil unrest, had two distribution centres looted — with one razed to the ground by arson — and 43 stores ransacked. It has managed to reopen eight shops and expects most will be open soon.
It is widely believed that large companies are well insured, but Massmart said that while it is too early to estimate the cost of damage caused by the unrest, its insurance cover will not fully offset the losses suffered.
Immediately after the riots, Walmart publicly expressed support for the retailer that it has supported financially with a R4bn rolling loan.
The looting and subsequent loss of sales in the stores that remain shut are another blow to the company, which is under the guidance of US-born CEO Mitchell Slape, a career Walmart executive who is highly regarded by the market.
Slape has been leading efforts to cut operating costs, improve profitability and improve the product assortment and availability at Game. Slape and two other Walmart executives brought in to SA are overhauling Massmart’s supply chain and logistics capabilities and investing in improving e-commerce.
The first-half results show that the turnaround strategy at Game, which has included investment in new software, better customer service and more efficient e-commerce, will take longer than expected to show results.
Gryphon analyst Casparus Treurnicht said the improvement at Game will take longer than investors initially thought.
“Massmart management is cleaning up, getting rid of unused space and repositioning Game. This will take longer than investors expect, judging by what the share price has done for the year to date,” he said.
“The consumer does not currently understand why they should be going to Game. Slape wants to change that.”
Sales at Game fell, even compared with 2020, when it was forced to close its doors for the month of April because of lockdown regulations. Turnover in SA stores was down 4.6%, with comparable stores decreasing 3.7%. Game is mostly located in large malls, which have seen fewer consumers since the pandemic began.
“Foot traffic in most super and regional malls and retail centres remains constrained, as consumers prefer to avoid crowded indoor spaces in the light of Covid-19 infection concerns,” Massmart said.
Other divisions in the retailer, which reported improved finance and interest charges, did much better.
Makro recorded total sales of R13.7bn, which increased by 13.5% over the prior year, even with a ban on alcohol sales in January and continued pressure on the hospitality sector. Liquor sales make up about 25% of Makro revenue.
Sales of R7.2bn at Builders were up 24% on the year before, driven by consumers continuing to invest in their homes. This is an 18-month trend that is also seen in recent results by competitor Italtile.
Reddy said Massmart should look to either wind up or sell Game and sharpen its focus on the much more successful Makro and Builders formats.
However, the retailer has said it will not shut Game and believes it can turn it around because up to 40% of South Africans buy appliances such as televisions from Game.
The headline loss per share from continuing operations, excluding the Game impairment, is expected to improve by between 51.6% and 61.6% from the year-earlier period with losses of between R320m and R400m.
The company is facing a weak consumer with lower spending power, it said.
“While the partial easing of Covid-related trading restrictions marked slightly better trading conditions for the reporting period, further Covid-19 waves of infection prompted more liquor bans, extended levels of lockdowns and curfews, rising unemployment has consequently adversely affected consumer confidence,” Massmart said.
The company is selling the Cambridge and Rhino discount food supermarkets as it exits fresh food operations.
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