Massmart delivers satisfactory results in tough market conditions

Massmart reported a 6,1% increase in sales to R24 154 million, achieved against the backdrop of a South African recession, the economic slowdown in Africa, ongoing currency volatility and a trading environment dominated by negative comparable sales growth and low internal sales inflation (1.6%).

With currency volatility continuing to distort its African businesses performance, management’s focus was on the margin, costs and stock control. For example, while operating profit declined by 15%:

• the pre-forex decline was 5,9%;
• the number of full-time equivalent employees only increased by 1,5% despite 36 new and acquired stores;
• comparable expense growth was only 2,5%.

Cash flow from operations increased by 2,2% to R2 585 million due to an improvement of net working capital levels.

Headline earnings and headline earnings per share (HEPS) declined by 19,5% and 19,9% respectively. Excluding forex losses, headline earnings declined by 9,8% while HEPS declined by 10,3%.

Food inflation dropped throughout the period, ending close to 1% overall and -10% in commodities’ thanks largely to lower global commodity prices and a stronger Rand. Food wholesalers were particularly hard hit as independent retailers delayed purchases in anticipation of lower prices.

General merchandise inflation also declined to -0,5% as the stronger Rand brought down the price of imported goods, with deflation evident across many technology-based categories.

Despite difficult market conditions Masscash, the group’s wholesale and retail cash and carry business, reported a 13,1% growth in sales, while trading at Massbuild increased by 8,6% as a result of improved prices and product offerings, consumers looking to maintain their homes, an increased focus on the contractor market and market share gains following industry consolidation. Both divisions delivered a 2,6% increase in trading profit.

Makro showed a 1,5% increase in store sales and a 10,5% decrease in trading profit.

Although Massdiscounters’ SA businesses performed well growing sales and trading profit, divisional trading profits were negatively impacted by the economic slowdown in Africa and weaker local currencies resulting in products becoming more expensive. The division’s sales grew by 0, 4% with a 14,5% decrease in trading profit.

While consumers remained under intense pressure throughout the second half of 2009, festive season sales figures and recent national data point to signs of a recovery in consumer spending, which bodes well for future earnings growth.

Highlights

Financial Review

• Total sales increased by 6,1% to R24 154 million Comparable-store sales declined by 0,5%. Sales inflation was 1,6% Gross profit of 17,8 %, slightly lower than prior year’s 18,1% Total expenses increased only 8,9%, largely due to acquisitions; comparable expense growth of 2,5% Headline earnings and Headline EPS declined by 19,5% and 19,9% respectively; pre-forex decline: 9,8% and 10,3% respectively Return on equity of 30,6% at December 2009 Interim cash dividend of 252 cents per share, same level as interim dividend in 2009 * Thuthukani dividend of 252 cents per share, equivalent to 100% of the ordinary dividend.

Strategic and Operational Review

Commenting on the results, Massmart CEO Grant Pattison said: “The past 12 months have been the most difficult since listing in 2000, and there is no question that Massmart’s earnings were affected by Rand volatility over the past 18 months. Given the group’s cyclical product mix however, the business has performed reasonably through the recession and is now positioned to perform well in the economic upturn ahead.”

Pattison said good progress had been made on all dimensions of the group’s strategic plans.

• Net trading space increased by 7,3% to a total of 1 164 201 m² and total stores stand at 290 following four store closures, 15 store openings and 25 store acquisitions Group inventory levels well controlled; only 8,4% higher despite acquisitions and new stores Construction of new Massdiscounters Gauteng regional distribution centre underway Four new wholesale Cash and Carry stores and six new Retail Cash and Carry stores opened or acquired Re-branded Game Store credit card performance ahead of expectations
• Independent verification of improved BBBEE rating from level 5 to level 4 contributor; scores increased from 56% to 66% * Graduate Training Programme hugely successful; 70 previously disadvantaged graduates secured jobs in the Group.

For the 34 weeks to 21 February 2010, total sales increased by 6,7% and comparable sales by 0,4%, showing an encouraging turnaround that seems to have begun in mid-December 2009.

“These recent sales trends suggest the worst is behind us, and should the current trends and currency values continue, Massmart could comfortably grow profits in the second half and perhaps even grow earnings for the 2010 financial year.

“Given the robustness and agility of the Group’s human and operational performance over this period, we are confident that financial performance will follow,” said Pattison.