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Tsk, you people: why aren’t you buying Massmart stuff?


Tsk, you people: why aren’t you buying Massmart stuff?

Game and Dion Wired’s almost complete wipeout of profits were behind the group’s slump in earnings

Chris Gilmour

Despite being well-signalled to the market, Massmart’s results for the 52 weeks to end-December 2018 were so poor that CEO Guy Hayward made a heartfelt apology for them at the company’s presentation to investors. Only cost discipline prevented them from being even poorer.
Operating in a tough 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. Office relocation, lack of management focus, and poor fresh division stock control (that should hopefully not recur) were key reasons behind plummeting earnings.
Masscash turned in a strong performance; Massbuild was flat in terms of profit growth; Massdiscounters had a disastrous year; and profits at Masswarehouse fell substantially. Group headline earnings per share fell 32% and the dividend was slashed by 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 sales mix being skewed towards low margin foods. Comparable sales here grew by 2.1% to R28.7bn, while comparable trading profit grew by 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 and was the main reason for the group’s slump in earnings. Sales fell by 1.2% to R19.7bn and trading profit plummeted by 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, largely due to disruption caused by relocation of Game’s head office from Durban to Johannesburg. This cost R116m but management expects to save R30m a 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 by 5.4% to R28.8bn, with good growth in liquor and durables, but food sales saw deflation. The huge blot is trading profit which fell by 12.4% to R1.1bn. Two key reasons drove this dive – unacceptably high cost growth of 9.2% and poor stock control in the fresh business operation, resulting in a once-off write off. Hayward did not reveal specifics, but said 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 by 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.
Consumer spending in SA remains poor, unlikely to change anytime soon. However, Massmart’s earnings may have bottomed, considering that the standout 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 said “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.
Chris Gilmour is an investment analyst

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