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Is Walmart a bit sick and tired of slack-assed Massmart?


Is Walmart a bit sick and tired of slack-assed Massmart?

US consumer goods giant might well decide it has bigger priorities than its underperforming SA subsidiary

Chris Gilmour

Massmart recently released a somewhat confusing second trading update for the six months to end June 2018, having previously released a first trading update in late May.
On this revision, financial metrics appear to have improved slightly to the extent that the group’s earnings growth may be declining more slowly than originally forecast. But performance is still poor and there are precious few reasons to get excited about its prospects.
The share has been a profound disappointment, and the fanfare accompanying its majority acquisition by Walmart, announced in 2010, has fallen short of expectations and completely evaporated. Relative to other large fast-moving consumer goods (FMCG) retailers in SA, Massmart stands out as the only share to have declined in value since the Walmart declaration to buy.Over the past eight years, Shoprite and Spar have more than doubled in price, while Pick n Pay has risen by 68%. Compare this to Massmart’s equivalent 22% decline which makes it the cheapest of all the large FMCG stocks, trading on a relatively low price/earnings ratio of 15.7 times compared to Spar at around 18, Shoprite on 24 and Pick n Pay on 27. There’s a reason why it’s cheap and that’s because it’s going nowhere slowly.Comparisons with the large FMCG players are not strictly accurate as Massmart is more of a general merchandiser, while the others are predominantly in food retailing and distribution. And to be fair, the landscape for many of Massmart’s segments has changed considerably over the past few years, notably in appliance retailing, where the company is represented by Dion and Game. Significant deflation has been the order of the day here, thanks to global technological innovation, making it virtually impossible to record any revenue growth.
At the time of the Walmart announcement, it was widely and naturally assumed that Massmart businesses would ride on the coat-tails of the new shareholder which is the world’s largest retailer. SA consumers were expected to reap the benefits of Walmart’s global buying power. The reality has been markedly different and the impact of Walmart’s reach and strength has not been obvious to the average local shopper. Other than in Massmart’s very low-end food retailer, Cambridge (which was in any case offering low prices before the Walmart deal), Massmart group prices are not materially different from competitors.The other potential benefit, being growth in the rest of Africa, has also failed to inspire. The proportion of revenue coming from beyond SA’s borders has remained static at around 8% since 2010.
For the six months to end June 2018, and excluding restructuring costs, headline earnings per share are expected to decline by between 16% and 26%. In its previous trading update, the expected fall was a larger 36% to 46% range. The “less bad” news is due to sales trends improving slightly after the late May update, as well as improved performances in both Massdiscounters and Masscash.
Full-year company guidance in the May update was reasonably optimistic, anticipating that 2018 HEPS will be largely in line with 2017. However, we need to see more detail and that should be forthcoming with the release of interim results on 23 August 2018. The market appears to be expecting something quite profound, as evidenced by an 8% share price rise on the day of the second update.
Massmart has been treading water for some time. This is not where an aggressive global retailer like Walmart wants its subsidiary to be; and it will be instructive to see if Walmart retains its shareholding in Massmart for much longer. The shareholder has more important battles to fight, notably with the likes of Amazon, and it can do without distractions such as Massmart. It exited Germany some time ago and with the planned merger of Asda and Sainsbury in the UK, it will soon be leaving Britain, so perhaps we can also expect a withdrawal from Africa.
Chris Gilmour is an investment analyst.

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