Despite being well-signalled to the market, Massmart’s results for the 52 weeks to the end of December 2018 were so poor that CEO Guy Hayward made a heartfelt apology for them at the company’s investor presentation. Only a sustained cost discipline prevented them from being even poorer.
Operating in a tough ambient economy across the continent, sales rose 2.9% to R90.9bn, with real comparable sales growth at only 1.4%. Trading profit dived 17% to R2.1bn. Key factors – moving office, lack of management focus and poor fresh division stock control – that should hopefully not recur, were key reasons for plummeting earnings.
Masscash turned in a strong performance; Massbuild was flat in terms of profit growth; Massdiscounters had a disastrous year; and profit at Masswarehouse fell substantially. Group headline earnings per share fell 32% and the dividend was slashed 40%.
Masscash, comprising Rhino, Jumbo and Cambridge, is a major group revenue contributor, at 32%, but the lowest trading profit contributor at 6.5%, due to the sales mix being skewed towards low margin foods. Comparable sales grew 2.1% to R28.7bn, while comparable trading profit grew 48.4% to R188.6m. This excellent profit performance was due to Rhino and Jumbo wholesalers benefiting from reduced competition, a better second-half margin performance and good expense management.
Massdiscounters, comprising mainly Game and Dion Wired, suffered an almost complete wipeout of profits.
Massdiscounters, comprising mainly Game and Dion Wired, suffered an almost complete wipeout of profits and was the main reason for the group’s earnings slump. Sales fell 1.2% to R19.7bn and trading profit plummeted 91%, from R374m to R32.6m. Product deflation was 2.9%, market share was maintained or grown slightly, but December sales were unexpectedly weak.
The division lost 1% in trading margin, due largely to disruption caused by relocation of Game’s head office from Durban to Johannesburg. This cost R116m but management expects to save R30m per year from this change.
“The move to Joburg distracted the business”, said Hayward. “And during the relocation, trading disciplines were not robust.” He is confident that when management puts its eye back on the ball, the trading margin will recover.
Sales at Masswarehouse, mainly Makro and Fruitspot, rose 5.4% to R28.8bn, with good growth in liquor and durables, but food sales seeing deflation. The huge blot is trading profit, which fell 12.4% to R1.1bn. Two key reasons drove this dive, being unacceptably high cost growth of 9.2%; and poor stock control in the fresh business operation, resulting in a once-off write-off. Hayward will adamantly not reveal specifics, only indicating that more than 20 management and staff had to go.
November Black Friday sales were good, rising 16% to R1.8bn over the three-day period compared with the previous year’s event. Makro enjoyed a 10% increase, and Builders Warehouse sales rose 33%, with appliances, especially air conditioners, selling especially well. Of all the major fast-moving consumer goods retailers, Massmart probably has the strongest correlation to enhanced Black Friday consumer spending, and leveraging off this, Game stores opened the event at midnight.
The SA economic background, specifically that of consumer spending, remains poor, and is unlikely to change anytime soon. However, Massmart’s earnings may have troughed, considering that the stand-out problem at Massdiscounters should not recur, and will indeed give a boost to future trading periods.
Sales for the first seven weeks of the current financial year were mildly encouraging, with nominal sales growth of 5.2% and comparable sales growth of 3.9%. Despite this slightly improved outlook, Massmart remains cautious on the first half, even though Hayward asserts that “Massmart is probably the lowest cost operator in the SA retail space”.
The share price has fallen 50% from its peak of R177 a year ago. If headline earnings per share can quickly climb back to the 2017 level, simply by restoring the Massdiscounters trading margin, and with no repeat of the fresh business inventory problems, the share price will then be on a price:earnings ratio of 14.3, which is reasonable in this environment.
• Gilmour is an investment analyst.
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