The 2013 financial year was a particularly difficult year. Fractious labour conditions continued to plague the South African economy throughout the year, labour unions in numerous sectors went on strike and the rate of unemployment in the country reached an all-time high. The significant slowdown in credit extension, specifically unsecured credit, led to moderate growth in consumer spending. These factors affected all consumers, but the lower and middle income consumers were definitely hardest hit. Massmart’s formats which sell to the higher Living Standards Measures (LSM) customer performed considerably better than those which sell to the lower and middle LSM sectors. Strong performances in Massbuild, Makro and Africa were unfortunately offset by a poor trading result in Game SA and difficult trading conditions in Wholesale Food.

The 2013 year was also an important year from an investment perspective as the Group reached the end of: a number of years of rolling-out Regional Distribution Centres (RDCs); the aggressive roll-out of new Makro stores; the introduction of Food Retail across three divisions; and the Walmart integration. These investments resulted in high occupancy and depreciation costs which should all have annualised during the current year.

The benefits to date to Massmart of the Walmart transaction have largely been through the transfer of intellectual property and therefore are difficult to usefully quantify. These benefits include assisting the Group with its strategic journey into Food Retail; leaning on the experience of Walmart as we rolled out our supply chain and logistics strategy; a focus on lowering new stores’ capital costs; an appreciation of Every Day Low Price (EDLP); the Group’s direct-to-farm process; and the introduction of some new private label brands.

Being part of the Walmart global organisation, does however introduce some incremental cost including the cost of compliance with US regulations and the cost of various expatriates operating in the Group. These costs will be on‑going and as such we have chosen to treat them as normal costs. From the 2013 financial year, these costs have not been separately disclosed but rather included on a line-by-line basis in the income statement.

Financial targets

The Group has medium-term financial targets or measures that we believe represent optimal performance levels within the income statement, statement of financial position, or the combination of both. Certain of these targets are ‘stretch targets’ that will only be achieved in the medium term. In addition, these targets are also ‘through-the-cycle’ targets, meaning that during a strongly negative or positive economic environment, we may under- or over-perform against those targets.

These target ratios are shown below:

Medium-term target ratios Definition
ROS – 5.0% Return on sales (ROS) is the ratio of earnings before interest and tax, excluding foreign exchange amounts, to sales
ROE > 35% Return on equity (ROE) is the ratio of headline earnings excluding Walmart costs (prior to Dec 2013) and foreign exchange, to average ordinary shareholders’ equity
Gearing ˜ 40% Gearing is the ratio of average long-term interest-bearing debt to average ordinary shareholders’ equity
Dividend cover of x 1.55 Dividend cover represents the ratio of headline earnings to dividends paid to ordinary shareholders

 

6.Investors_4_Photo

 

6.Investors_5_KeyPoints

 

Return on sales (ROS)

This ratio combines all the key income statement elements, being sales, gross margin, supplier income expenses (including depreciation and amortisation), but excludes foreign exchange translation gains or losses. Every key financial aspect of the retail or wholesale business model is therefore captured in this ratio. The reason foreign exchange translation gains or losses are excluded is because they are largely beyond management’s control, are volatile, and do not reflect the sustainable profitability of the Division or Group.

Returns for December 2013 and the prior year were negatively impacted by the disappointing performance in Game SA, the difficult trading conditions in the Wholesale Food sector, and increased depreciation and occupancy costs. Game SA comparable sales, specifically in general merchandise, slowed significantly during the year. Game SA sales were affected by the slowdown of the middle income consumer, the global slowdown in general merchandise, in particular electronics, and some disappointing operating disciplines, including poor in-stock levels. Toward the end of the 2012 calendar year, the Group’s only ‘formal’ Wholesale competitor ceased trading. Many of the sites were taken over by strong independent traders which resulted in a much tougher, more competitive environment during 2013. Depreciation and Occupancy costs comprised 6.4% and 22.2% of total costs respectively and the high increases on prior year are a consequence of the Group’s significant increase in RDCs, the roll-out of new stores and the introduction and continued roll-out of Food Retail in three Divisions.

6.Investors_6.1_ReturnOnSales_2

 

All periods are 12-month periods.

Return on equity

Massmart is committed to delivering superior returns to shareholders over the longer term. The Group’s medium-term targets are to exceed a 35% return on average ordinary shareholders’ equity (ROE).

The decline in the Group’s profitability (measured by ROS) coupled with the Group’s strategic significant investment in Food Retail and supply chain were the main causes of the decline in the Group’s return on shareholders’ equity. The Group’s on-going investment in new stores and new businesses increased the size of the net asset value. As the Group’s profitability improves, and as the new stores, RDCs and business begin to trade optimally, the ROE will improve to higher levels. During the periods under review, the significant strategic investment in capital assets caused the ROE to remain at lower levels.

The Divisions are responsible for delivering operational returns, being their returns to their net working capital and non-current assets excluding goodwill and trademarks. In addition to these operational returns, Massmart, through the Board and Executive Committee, is responsible for delivering investment returns that will also include the book value of intangibles (specifically goodwill arising from the acquisition of subsidiaries), as well as setting the Group’s gearing levels that will influence returns to shareholders and the overall risk profile. Depending upon the purchase price, retail and wholesale acquisition of subsidiaries tend to generate significant accounting goodwill owing to the relatively low net asset values of these business models.

 

6.Investors_6.2_ReturnOnEquity_2

The Divisions are recapitalised annually by Massmart with non-interest-bearing shareholders’ funds that are equivalent to the book value of long-term assets in each Division. Each Division must therefore fund its net working capital position through cash or interest-bearing debt, depending upon the characteristics of that business model. This process enables divisional returns to be evaluated and compared on a consistent basis across the Group, and from one year to the next.

Massmart’s current return on average shareholders’ equity (excluding Walmart costs (in the prior year) and foreign exchange) is 25.9% (Dec 2012: 30.8%).

Gearing (or leverage)

Massmart prefers some gearing, up to approximately 40%, in order to leverage the return on shareholders’ equity but without introducing excessive financial risk to the Group. It should be noted here however, that our stores’ lease obligations represent a significant form of permanent gearing (these lease obligations currently represent a discounted present value of approximately R8.9 billion (Dec 2012: R8.1 billion)).

The Group has decided to own rather than lease certain of its larger, stand-alone, key strategic store formats, specifically Makro and Builders Warehouse stores, and this will add incrementally to the Group’s gearing. This change does not represent a major financial shift however as it will result in converting a fixed long-term lease commitment, which is recorded off-balance sheet, to an on-balance sheet asset or liability. Significantly, the Group acquired control of seven Makro stores that had previously been lease-held with effect from January 2013. This transaction has been covered in the ‘Acquisition of subsidiaries and property’ paragraph on the next page. There are currently two separate transactions to acquire properties, totalling R550.0 million, where we are awaiting transfer. As regards to financing any future acquisition of subsidiaries, depending on the target company’s cash profile and cash generation ability, this gearing ratio may be increased.

In addition to the above, the Group’s strategic focus on: owning more of our stores, trialling new formats in East and West Africa, increased roll-out of Food Retail and opening more low-income home improvement stores in South Africa, has had the effect of pushing the gearing levels up in the short term.

The Group’s average gearing was 39.8% (Dec 2012: 28.5%).

Dividend cover

Massmart’s dividend policy is to declare and pay a total annual cash dividend representing a 1.55 times dividend cover unless circumstances dictate otherwise. There were no STC credits available for use as part of this declaration. The number of shares in issue at the date of declaration was 217,109,044.

The Group maintained the absolute value of the dividend in the prior 12 months despite the lower effective headline earnings per share. Notice was given that a gross final cash dividend of 275.00 cents per share in respect of the period ended December 2013 was declared. The dividend was declared out of income reserves and will be subject to the Dividend Tax rate of 15% which will result in a net dividend of 233.75 cents per share to those shareholders who are not exempt from paying dividend tax. Massmart’s tax reference number is 9900/196/71/9.

The dividend cover ratio is not a target – because it is already being achieved – but is disclosed to give shareholders clarity on future dividend levels. The Board believes that this dividend cover ratio is appropriate, given the Group’s current and forecast cash generation, planned capital expenditure and gearing levels.

Historical actual dividend cover ratios:

Dec 2013 Dec 2012 June 2012 Dec 2011 June 2011 June 2010 June 2009 June 2008 June 2007 June 2006
Actual dividend cover x 1.46 x 1.18 x 1.41 x 1.65 x 1.07 x 1.50 x 1.56 x 1.70 x 1.70 x 2.00

 

Change in financial year-end and reviewed financial information

To align with Wal-Mart Stores, Inc. (Massmart’s ultimate holding company), in 2012 Massmart changed its financial year from June to December with effect from the previous reporting cycle. To assist with comparisons of the prior financial year of 26 weeks, reviewed 52-week information for December 2012 has been provided where appropriate.

Acquisition of subsidiaries and property

With effect from 25 January 2013, Massmart acquired control of seven Makro stores that had previously been lease-held. The cash consideration paid for control amounted to R577.2m and was funded by long-term interest-bearing debt. This transaction was aligned to the Group’s strategy of investing for the future. In the 52 weeks to December 2012, the Group acquired the trading assets of five small businesses, all in the Masscash division. The net cash purchase price of R56.9 million gave rise to goodwill of R38.4 million. No contingent payments were provided for any of these acquisitions. During this same period, the Group acquired two businesses, being Fruitspot and the Rhino Group. Both of these acquisitions were aligned to the Group’s strategy of rolling out Food Retail. Makro acquired Fruitspot with effect from 2 January 2012 and Cambridge acquired the Rhino Group with effect from 1 March 2012. Together these acquisitions amounted to a net cash purchase price of R326.7 million and gave rise to goodwill of R485.2 million. Liabilities were raised on the business acquisitions of R182.3 million, dependent on these businesses achieving certain profit hurdles in the two years following the deal. Both businesses have met these profit hurdles and the business acquisition liabilities have been paid except for R24.1 million that is being carried at December 2013 in the Group’s statement of financial position as a short term provision for the Rhino Group and is due to be paid within the next 12 months. Acquisition of subsidiaries and property is described in more detail in note 3.

Massmart has continued with its stated intention to acquire strategic properties from which it operates. There are currently two separate transactions to acquire properties, totalling approximately R550.0 million, where we are awaiting legal transfer.

Disposals

During the 52 weeks to December 2012, the Group disposed of a small Mozambican Masscash cash and carry business. The loss on disposal amounted to R3.8 million after tax. In this same period, another small Masscash business in South Africa was in the process of being sold. The assets and liabilities were re-valued to the lower of carrying value and fair value less costs to sell and disclosed separately as non-current assets or liabilities classified as held for sale in the statement of financial position. This business was sold in the current period at book value and no gain or loss was recorded on the transaction. Disposals are described in more detail in note 20.

Accounting policies

There were no significant changes in accounting policies during the year.
The accounting policies are detailed in note 1. The adoption of new accounting policies are detailed in note 2.

Impact of the 53rd week

In line with most major international retailers, Massmart runs its internal accounting and administrative timetable using the retail calendar which treats each financial year as an exact 52-week period. This has the effect of a day per year being ‘lost’ which is then caught up every seventh year by including a 53rd week in the financial calendar. This is not an ‘artificial’ week – the Group’s earnings and cash are higher as a result of trading during this week.

This additional week includes sales, the associated gross margin and a limited amount of variable expenses. The estimated impact of the 53rd week is shown below:

6.Investors_7_ImpactOf53rdWeek

The 53rd week has another future consequence, namely that the growth in the second half of the 2014 financial year will appear to be relatively muted compared to this 27-week period.

All figures shown below in this report are for the 53-week period, unless noted otherwise.

Income statement
for the year ended 29 December 2013
December 2013 December 2012 December 2012
53 weeks 52 weeks 26 weeks
Rm Rm Rm
(Audited) (Reviewed) (Audited)
Revenue 72,512.9 66,050.3 36,234.5
Sales 72,263.4 65,839.5 36,122.6
Cost of sales (58,926.4) (53,563.0) (29,523.2)
Gross profit 13,337.0 12,276.5 6,599.4
Other income 249.5 210.8 111.9
Depreciation and amortisation (731.1) (661.2) (342.6)
Impairment of assets (41.6) (21.6) (5.4)
Employment costs (5,423.5) (4,686.5) (2,487.5)
Occupancy costs (2,555.3) (2,296.5) (1,225.6)
Foreign exchange loss 67.8 (231.6) (76.7)
Walmart transaction, integration and related costs - (348.9) (205.2)
Other operating costs (2,750.3) (2,533.0) (1,243.2)
Operating profit 2,152.5 1,708.0 1,125.1
Finance costs (283.8) (217.4) (106.0)
Finance income 28.7 90.0 45.6
Net finance costs (255.1) (127.4) (60.4)
Profit before taxation 1,897.4 1,580.6 1,064.7
Taxation (555.3) (549.6) (342.3)
Profit for the year 1,342.1 1,031.0 722.4
Profit attributable to:
Owners of the parent 1,283.0 972.3 691.8
Preference shareholders - 5.0 1.4
Non-controlling interests 59.1 53.7 29.2
Profit for the year 1,342.1 1,031.0 722.4
Earnings per share (cents)
Basic EPS 591.4 449.8 319.7
Diluted basic EPS 585.1 443.2 315.4

 

Sales

Total Group sales for the December 2013 financial year increased by 9.8% to R72.3 billion. Total and comparable store sales for the 52-week period increased by 7.5% and 3.8% respectively over the comparative period. Comparable store sales exclude new store openings or closings in the current and prior year. Sales in our African businesses represented 7.7% of total sales and increased by 16.6% in Rands and 10.9% in local currencies. The Group’s average product selling price inflation rate for the year was 2.7% (52 weeks to Dec 2012: 4.4%/ 26 weeks to Dec 2012: 3.7%), suggesting a real comparable volume growth of 1.1%. The Group succeeded in maintaining or growing market share in each major category it trades in during the year. The Group’s formats which retail to higher LSM customers performed significantly better than those formats which sell to lower and middle LSM consumers.

Inflation for each of the Group’s major product categories is shown in the table below.

6.Investors_8_Sales

General Merchandise inflation measured 2.1% for the 52 weeks to December 2012, positive for the first time in almost five years, but slowed to 0.1% for the year to December 2013, significantly below the Group’s cost inflation. Some inflation in this category will be positive for the business as the Group will need to move less volume in order to achieve the same level of sales, thereby incurring lower costs. Food and Liquor’s inflation slowed to 4.1% and Home Improvement inflation increased to 3.7% for December 2013.

Looking ahead to December 2014, inflation is expected to increase slightly in General Merchandise due to a combination of the weaker Rand and product inflation out of the East. Food inflation is likely to increase significantly, driven by commodities such as maize and sugar. If the Rand remains at current levels, we estimate product inflation should range between 4% and 6%.

During the December 2013 financial year, 15 stores were closed, one store was sold and 35 stores were opened, resulting in a total of 376 stores at December 2013. Net trading space increased by 4.8% to a total of 1,481,308m². New space has not been proportionately adjusted if the store was not open for part of the financial year. The detailed store movement is explained in the table alongside.

Gross profit

The Group’s gross profit of 18.46% is lower than that of the comparative prior period of 18.65%. This is as a result of a combination of an increased contribution from Game Africa and an improved margin performance in Massbuild; both of which were offset by the difficult trading conditions in Wholesale Food, a greater overall Group Food contribution at a lower margin and General Merchandise margins in Game SA being under pressure throughout the year.

The Group’s gross margin is dependent upon the sales mix across the Divisions and the required trading aggression occasioned by competitor activity. In a positive economic cycle, it should increase marginally owing to the increased contribution from the higher-margin Massbuild Division, as well as a higher proportion of General Merchandise sales. Gross profit includes rebates and other forms of income earned from suppliers as well as on-going revenue from sales of cellular products and airtime.

Other income

Other income for the year to December 2013 of R249.5 million (52 weeks to
Dec 2012: R210.8 million/26 weeks to Dec 2012: R111.9 million) comprises royalties and franchise fees from in-store third parties, property rentals, investment income excluding interest, dividend income, sundry third party management and administration fees, distribution income, commission from RCS sales and income from extended warranty insurance. Other income is described in more detail in note 4.

 

store-listing

Expenses
December 2013 December 2012 December 2012
53 weeks 52 weeks 26 weeks
Rm Rm % change Rm
Depreciation and amortisation (731.1) (661.2) 10.6% (342.6)
Impairment of assets (41.6) (21.6) (5.4)
Employment costs (5,423.5) (4,686.5) 15.7% (2,487.5)
Occupancy costs (2,555.3) (2,296.5) 11.3% (1,225.6)
Other operating costs (2,750.3) (2,533.0) 8.6% (1,243.2)
Walmart integration and related costs* - (208.9) - (65.2)
Total expenses (11,501.8) (10,407.7) 10.5% (5,369.5)
Operating expenses as % of sales (15.9%) (15.8%) (14.9%)
* Walmart integration and related costs does not include Walmart transaction costs.

 

Previously Walmart integration and related costs were separately disclosed. During the current year, we have treated these costs as ‘normal’ business costs and have therefore included them on a line-by-line basis.

Total expenses (excluding foreign exchange movements in both years and Walmart transaction costs in the prior year) increased by 10.5%. The impact of the Group’s continued investment in capacity and growth can be seen in the 10.6% higher depreciation and amortisation charge; the 11.3% increase in occupancy costs, and the increased employment cost to man the new stores and RDCs. These increases relate to the opening of the Massbuild National Distribution Centre and 35 new stores. Comparable expenses increased by 7.2%.

Total expenses represent 15.9% of sales, an increase compared to the comparative period’s 15.8%. The major expense categories and significant expenses included in total expenses are discussed in more detail below.

Employment costs

Employment costs are the Group’s single largest cost category and contribute 47.2% of total expenses. Employment costs are 15.7% higher than the 52 weeks to December 2012. As a percentage of sales, employment costs increased to 7.5% (52 weeks to Dec 2012: 7.1%). On a comparable basis, these costs increased by 9.5%. Included in employment costs are IFRS 2 Share-based Payments charges of R126.3 million (52 weeks to Dec 2012: R141.1 million) which arise from shares and options issued to beneficiaries of the Massmart Employee Share Trust, the Massmart Thuthukani Empowerment Trust BEE Staff Scheme (only relating to the prior comparative period as this scheme was terminated in this period) and Black Scarce Skills Trust. The Group employed 4.2% more employees (on a full-time equivalent basis) compared to December 2012, increasing as we opened new stores. Included in the current year are costs relating to resources required for compliance, including the US Foreign Corruption Prevention Act compliance, and the cost of the remaining Walmart expatriates.

On 1 October 2012, the final conversion of ‘A’ preference shares to ordinary shares for the beneficiaries occurred through the Massmart Thuthukani Empowerment Trust. The employees had the option of converting their remaining share allocation into Massmart ordinary shares and continue to receive 100% of the dividend on their ordinary shares or they could sell their remaining share allocation and receive net proceeds after tax and selling expenses. The related share-based payment reserve was released to retained income and this entry had no impact on the income statement. Going forwards, the Group will not account for any share-based payment expenses relating to the Massmart Thuthukani Empowerment Trust BEE Staff Scheme.

For the forthcoming year, the Group’s salary increases will be between 5.0% and 7.0% and wage increases, many of which have already been agreed, are in a range of 7.0% to 8.5%.

Occupancy costs

The Group’s second biggest cost at 22.2% of total expenses is 11.3% higher than the 52 weeks to December 2012, largely due to the opening of the Massbuild National Distribution Centre and 35 new stores resulting in a net new total space of 5.9%. On a comparable basis, these costs increased by 8.7%.

Property lease costs comprise 65.3% of total occupancy costs; the balance comprises ancillary property costs including municipal rates and services which continue to increase significantly above national South African inflation levels. Expressed as a percentage of sales, occupancy costs, at 3.5%, are flat on the comparative period. Resulting from the Group’s strategic focus on owning more property, these costs should reduce as a percentage of sales from 2014.

The lease-smoothing accounting policy applicable to operating leases (thereby affecting all store leases) has the effect of keeping comparable-store lease charges broadly equal from one year to the next, and so any increase in property lease costs between the years would be from new stores and lease renewals. Another effect of this accounting policy is that annual lease escalations no longer increase the Group’s lease charge. Adjusting for the non-cash lease-smoothing adjustment in both December 12 month periods shows that annual cash occupancy costs increased by 6.6% while total trading space increased by 4.8% and DC space increased by 11.4% during the same period.

Depreciation and amortisation

Depreciation and amortisation is the Group’s third largest cost category and represents 6.4% of total expenses. Owing to the accelerated capital investment in new stores and RDCs, the depreciation and amortisation charge increased by 10.6% which is ahead of sales growth, and will continue to increase ahead of sales growth, for the next 12 months due to the Group’s strategic focus on owning more property.

The three major cost categories described above together represent 75.7% of the Group’s total expenses. Other operating costs represent every other item of expense in the Group, including insurance, bad debts, travel, professional fees, advertising and marketing, stationery and consumables. Combined, this category represents the most manageable or variable costs and so while total costs in this category increased by 8.6%, comparable costs were well controlled and increased by only 3.3% and continue to receive intense management focus.

Impairment of assets

The impairment of assets in the current year relates to the impairment of acquired goodwill of R26.3 million, leasehold improvements of R4.4 million and fixture, fittings, plant and equipment of R10.9 million in Masscash as a result of store closures. The impairment of assets for the 52 weeks to December 2012 year relates to the impairment of leasehold improvements in Masscash of R5.4 million and to the impairment of certain acquired goodwill in Masscash of R16.5 million. More information relating to impairment of assets can be found in note 5.

Other significant items

As noted in the summarised income statement above, included in operating profit are net unrealised and realised gains on foreign currency transactions and translations of R67.8 million (52 weeks to Dec 2012: net loss of R231.6 million).

December 2013 December 2012 December 2012
53 weeks 52 weeks 26 weeks
Foreign exchange movement arising from: Rm Rm Rm
Loans to African operations 73.1 (226.3) (82.8)
Hedges - 5.2 (0.7)
Investment in a trading and logistics structure 22.3 (14.4) 1.0
Translation of foreign creditors (27.6) 3.9 5.8
67.8 (231.6) (76.7)

 

 

During the December 2013 financial year, the translation of the Group loans in the African balance sheets amounted to a R73.1 million foreign exchange gain in the income statement (52 weeks to Dec 2012: R226.3 million loss). The remaining net translation loss from other foreign monetary balances was R5.3 million (52 weeks to Dec 2012: R5.3 million loss). During May 2012, the Government of Malawi devalued the country’s currency by 50%. The effect of this was a loss on translation of the loans in Malawi amounting to R145.6 million. This loss was calculated on the day of devaluation and falls in the 52 weeks to December 2012 figures above. The Malawian Kwacha continued to devalue, and only strengthened against the Rand around June 2013. It then weakened further to close December 2013 net weaker on the Rand. During January and February 2013, the Group successfully managed to repatriate almost all its foreign currency cash from Malawi and has maintained these cash reserves at a very low balance of R12.6 million at December 2013. The Rand weakened against the Group’s African currencies basket, except against the Malawian Kwacha (already mentioned) and the Ghanaian New Cedi, and explains much of the gain recognised in the current year. Should the Rand continue to weaken against these currencies, it is likely that the Group will again report foreign exchange gains in the 2014 financial period. The foreign exchange gain/(loss) is described in more detail in note 7.

When a new store is opened, large once-off or exceptional operating costs are incurred in preparing the store (including temporary staff, marketing initiatives, special promotions, amongst others). These costs are referred to as store pre-opening costs and in the current year amount to R108.5 million (52 weeks to Dec 2012: R70.3 million). The current year includes the opening of the new stores for Game, DionWired, Makro, Builders Warehouse, Builders Express and Builders Superstores.

Trading and operating profit

Reconciliation between Trading profit and Operating profit before interest and tax December 2013 December 2012 December 2012
53 weeks 52 weeks 26 weeks
Rm Rm % change Rm
Trading profit before interest and taxation 2,145.4 2,147.8 (0.1%) 1,361.9
Asset impairments (41.6) (21.6) (5.4)
Walmart transaction costs - (140.0) (140.0)
Loss on disposal of business (1.8) (16.5) (4.4)
Fair value adjustment on assets classified as held for sale - (8.3) (0.4)
BEE transaction IFRS 2 charge (17.3) (21.8) (9.9)
Foreign exchange loss 67.8 (231.6) (76.7)
Operating profit before taxation 2,152.5 1,708.0 26.0% 1,125.1
Trading profit as % of sales 3.0% 3.3% 3.8%
Operating profit as % of sales 3.0% 2.6% 3.1%

 

Group trading profit before interest and tax, which is shown before accounting for the Walmart transaction costs (only in the 52 weeks and 26 weeks to December 2012) and foreign exchange, decreased by 0.1% on the 52 weeks to December 2012 which is significantly below sales growth of 9.8%. The Group’s lower net margin growth is a result of comparable sales being well below the growth in nominal gross domestic product coupled with expense pressure due to investing in new stores and RDCs, the roll-out of Food Retail throughout the Group and the additional costs resulting from the need to move additional volumes due to the continued low inflation in General Merchandise. Expressed as a percentage of sales, Group trading profit before interest and taxation deteriorated from 3.3% to 3.0%. To expand net margins, the Group needs comparable sales growths to approximate the rate of nominal gross domestic product growth.

Group operating profit, which includes the foreign currency translation movements, was 26% up on the 52 weeks to December 2012. After excluding foreign exchange, operating profit of R2,084.7 million was up 7.5% on the 52 weeks to December 2012. Considering the Group’s strategic investment in the future EBITDAR for December 2013 was up 10.0% on the 52 weeks to December 2012.

EBITDA and EBITDAR

 

December 2013 December 2012 December 2012
53 weeks 52 weeks 26 weeks
Rm Rm % change Rm
Operating profit before foreign exchange 2,084.7 1,939.6 7.5% 1,201.8
Depreciation and amortisation 731.1 661.2 10.6% 342.6
Impairment of assets 41.6 21.6 5.4
EBITDA 2,857.4 2,622.4 9.0% 1,549.8
Occupancy costs 2,555.3 2,296.5 11.3% 1,225.6
EBITDAR 5,412.7 4,918.9 10.0% 2,775.4

 

 

The Group’s December 2013 financial performance has been covered in detail above, but can broadly be summarised as:

  • Total sales growth boosted by new stores and acquisition of subsidiaries;
  • An additional trading week’s performance;
  • Subdued comparable sales growth achieved in a low product inflation environment but still achieving real volume growth;
  • Lower Group gross margins from a greater Food contribution at a lower margin contribution, difficult trading conditions in Wholesale Food and General Merchandise margins in Game SA being under pressure. These were offset slightly by improved gross margins in Massbuild and a higher contribution from Game Africa;
  • High occupancy and depreciation costs in line with the Group’s strategic investment in the future; and
  • Increased employment costs required for the additional investments and to meet the additional Walmart requirements.

Net finance costs

Net interest paid of R255.1 million, increased partly as a result of the Group’s capital expenditure programme, including the acquisition of certain key properties, and due to some inefficiencies in working capital levels specifically in Game SA. At R4.3 billion, the Group’s average borrowings are higher than the prior year’s figure of R3.2 billion and approximately R600.0 million of this relates to acquired properties.

The Group’s gearing ratio (debt:equity) increased to 39.8% (Dec 2012: 28.5%). Taking into account anticipated capital expenditure and excluding any unforeseen developments or new initiatives, the Group will remain net geared at similar levels for the foreseeable future.

Taxation

Tax rate reconciliation
December 2013 December 2012 December 2012
53 weeks 52 weeks 26 weeks
% % %
South African corporate taxation 28.0 28.0 28.0
Non-taxable income and disallowable expenditure (2.0) (2.1) 2.3
Allowances on lease premiums (0.3) (0.5) (0.6)
Assessed loss not utilised 1.4 1.5 2.1
Withholding tax 0.1 (0.7) (1.1)
Secondary Tax on Companies - 3.5 0.1
Other – including foreign tax adjustments and transaction related costs 2.1 5.1 1.3
Overall tax rate 29.3 34.8 32.1
TOTAL TAX CHARGE (Rm) 555.3 549.6 342.3

 

The total tax charge represents an effective tax rate of 29.3% (52 weeks to Dec 2012: 34.8%/26 weeks to Dec 2012: 32.1%). Due to the abolishment of STC in the prior year, there is no STC impact in December 2013 and a very small STC impact in the 26 weeks to December 2012 (52 weeks to Dec 2012: 3.5%/26 weeks to Dec 2012: 0.1%). The rate is also lower than the prior year due to the decreased level of non-deductible expenditure relating to the Walmart transaction in the current year. We expect Massmart’s future effective tax rate to normalise just below 30%, although higher tax rates in certain foreign jurisdictions may marginally increase this.

Massmart is unconcerned at any specific element of historical tax risk in the Group, but there remains the uncertainty that material adjustments arising from potentially unfavourable tax assessments of previous tax returns, some of which have not yet been assessed by SARS, could impact future tax charges. Extending this uncertainty is that SARS can reopen any tax assessment within three years of issuing such assessment. More information relating to taxation can be found in note 9.

 

Statement of comprehensive income
for the year ended 29 December 2013
December 2013 December 2012 December 2012
26 weeks 52 weeks 26 weeks
Rm Rm Rm
(Audited) (Reviewed) (Audited)
Profit for the year 1,342.1 1,031.0 722.4
Items that will not be re-classified subsequently to the income statement
Post-retirement medical aid actuarial gain 5.7
Items that will be re-classified subsequently to the income statement
Foreign currency translation reserve 47.2 6.0 25.1
Revaluation of listed shares 4.7 1.7 1.6
Cash flow hedges 7.0 (10.7) (5.8)
Less Income tax relating to the revaluation of listed shares (1.2) - -
Less Income tax relating to the cash flow hedges (1.9) 2.9 1.6
Other comprehensive income for the year, net of tax 55.8 (0.1) 22.5
Total other comprehensive income for the year, net of tax 61.5 (0.1) 22.5
Total comprehensive income for the year 1,403.6 1,030.9 744.9
Total comprehensive income attributable to:
Owners of the parent 1,344.5 972.2 714.3
Preference shareholders - 5.0 1.4
Non-controlling interests 59.1 53.7 29.2
Total comprehensive income for the year 1,403.6 1,030.9 744.9

 

The Group accounts for three movements in other comprehensive income that will be re-classified subsequently to the income statement: the movement of the foreign currency translation reserve; the revaluation of listed shares; and the net movement of cash flow hedges. As from the current financial year, the Group records the post-retirement medical aid actuarial gain/(loss) in other comprehensive income. This amount will not be re-classified subsequently to the income statement. This change in accounting was required due to the changes to IAS 19 Employee Benefits and more information can be found in note 2.

Headline earnings

Headline earnings, before foreign exchange, of R1,285.7 million is 7.7% above the 52 weeks to December 2012 of R1,193.8 million. Including foreign exchange however, increases headline earnings to R1,334.5 million which is 29.9% up on the 52 weeks to December 2012. The more representative figure is 7.7% which better reflects the Group’s actual trading performance in December 2013.

 

December 2013 December 2012 December 2012
53 weeks 52 weeks 26 weeks
Rm Rm % change Rm
Reconciliation of net profit for the year to headline earnings
Net profit attributable to owners of the parent 1,283.0 972.3 32.0% 691.8
Impairment of assets 41.6 21.6 5.4
Loss on disposal of fixed assets 11.9 16.4 6.2
Loss on disposal of business 1.8 16.5 4.4
Fair value adjustment on assets classified as held for sale - 8.3 0.4
Total tax effects of adjustments (3.8) (8.1) (2.7)
Headline earnings 1,334.5 1,027.0 29.9% 705.5
Headline earnings before foreign exchange (taxed) 1,285.7 1,193.8 7.7% 760.7
Headline EPS (cents) 615.2 475.2 29.5% 326.0
Headline EPS before foreign exchange (taxed) (cents) 592.7 552.3 7.3% 351.5
Diluted headline EPS (cents) 608.6 468.1 30.0% 321.7
Diluted headline EPS before foreign exchange (taxed) (cents) 586.4 544.1 7.8% 346.9

 

Headline earnings per share (HEPS), before foreign exchange, of 592.7 cents is 7.3% higher than the 52 weeks to December 2012 HEPS of 552.3 cents. Including foreign exchange however, increases HEPS to 615.2 cents which is 29.5% higher than the 52 weeks to December 2012.

After adjusting for the potential future conversion of 2.3 million shares (52 weeks to Dec 2012: 3.3 million shares), the diluted HEPS before foreign exchange is 586.4 cents (52 weeks to Dec 2012: 544.1 cents). Under the calculation required by IFRS, the number of potentially dilutive shares arose due to the significantly higher weighted-average Massmart share price during this financial year in comparison to the exercise price on the grants. This number decreased on last year due to the lower closing share price in the current year compared to the prior year. Headline earnings is described in more detail in note 11.

 

Statement of financial position
for the year ended 29 December 2013
December 2013 December 2012
Rm Rm
(Audited) (Audited)
Assets
Non-current assets 10,111.8 7,595.1
Property, plant and equipment 5,988.1 3,868.2
Goodwill 2,532.0 2,557.7
Other intangibles 396.8 387.6
Investments 231.9 258.8
Other financial assets 290.9 126.5
Deferred taxation 672.1 396.3
Current assets 16,036.1 15,422.2
Inventories 10,115.5 9,691.5
Trade, other receivables and prepayments 3,712.5 3,681.7
Taxation 12.0 17.0
Cash and bank balances 2,196.1 2,032.0
Non-current assets classified as held for sale - 2.5
Total assets 26,147.9 23,019.8
Equity and liabilities
Equity attributable to equity holders of the parent 5,173.0 4,739.7
Share capital 2.2 2.2
Share premium 743.3 752.1
Other reserves 517.6 323.3
Retained profit 3,909.9 3,662.1
Non-controlling interests 196.6 175.6
Total equity 5,369.6 4,915.3
Non-current liabilities 2,206.4 1,183.4
Non-current liabilities:
- Interest-bearing 1,178.7 671.8
- Interest-free 838.9 305.7
Non-current provisions and other 102.2 169.2
Deferred taxation 86.6 36.7
Current liabilities 18,571.9 16,921.1
Trade and other payables 16,774.2 15,305.5
Current provisions and other 327.0 363.8
Taxation 331.3 298.5
Other current liabilities 531.6 561.2
Bank overdrafts 607.8 392.1
Total equity and liabilities 26,147.9 23,019.8

 

This review covers the consolidated statement of financial position and the related notes.

Non-current assets

 

December 2013 December 2012
Rm Rm
Non-current assets 10,111.8 7,595.1
Property, plant and equipment 5,988.1 3,868.2
Goodwill 2,532.0 2,557.7
Other intangibles 396.8 387.6
Investments 231.9 258.8
Other financial assets 290.9 126.5
Deferred taxation 672.1 396.3

 

Tangible and intangible assets

Property, plant and equipment and goodwill together represent 84.3% (Dec 2012: 84.6%) of the Group’s total non-current assets.

Massmart continually refurbishes older stores and is building new stores and RDCs, and so during December 2013 capital expenditure of R1,987.1 million (52 weeks to Dec 2012: R1,163.0 million/26 weeks to Dec 2012: R666.8 million) was spent on property, plant and equipment. Of this, R683.7 million (52 weeks to Dec 2012: R511.1 million/26 weeks to Dec 2012: R279.8 million) was replacement capital expenditure, while the balance of R1,303.4 million (52 weeks to Dec 2012: R651.9 million/26 weeks to Dec 2012: R387.0 million) was invested in new capital assets, including new stores and the new RDC. The increase in expansionary capital assets can largely be attributed to the acquisition of the seven Makro stores for R577.2 million. Acquisition of subsidiaries did not impact Group property, plant and equipment in the current year but added a further R114.6 million for the 52 weeks to December 2012 (26 weeks to Dec 2012: R7.8 million).

6.Investors_9.1_CapitalExpenditure_2

All periods are 12-month periods.
* ‘Property Investments’ are included under ‘Investments and financial assets’.

 

In December 2013, goodwill decreased by R25.7 million, largely attributable to the impairment of goodwill in Masscash of R26.3 million. Under IFRS all goodwill must be tested annually against the value of the business units with which it is associated and, if overstated, that goodwill must be impaired. In the prior 52 weeks to December 2012, goodwill increased by R505.2 million, reflecting the two principal movements of goodwill arising from the acquisition of the trading assets in five entities in Masscash, the acquisition of Fruitspot and the acquisition of the Rhino Cash and Carry Group (totalling R522.7 million) less an impairment of R16.5 million in Masscash. For the 26 weeks to December 2012, goodwill increased by R36.3 million in most part due to the acquisition of the trading assets in five entities in Masscash for R38.4 million. No impairment was required in this period.

Other intangibles primarily represent computer software that IFRS requires to be disclosed in this category. In terms of IFRS the depreciation charge arising from this asset category is classified as an amortisation charge.

During the 2009 financial year the Group began to implement its strategic plan of investing in the future. This included the opening of a number of RDCs (space increase of 187% in the last five and a half years); the roll-out of new Makro stores (opened eight new stores in the last three and a half years); the purchase of leased Makro stores, and the roll-out of Food Retail across the Group including Masscash Retail and Foodco. Masscash Retail now operates out of 47 stores while Foodco can be found in 48 stores (including six outside of South Africa). Capital expenditure as a percentage of sales therefore increased from 1.2% of sales in 2006 to 2.9% at December 2013. Capital expenditure excluding property and property-related acquisitions for the year amounted to 2.1% of sales.

Capital expenditure, excluding property acquisitions for the next 12 months is budgeted to slow down as we begin to realise some of the benefits of the investments we have made during the last few years. We will continue to invest with the Group’s strategic drive to: own more of our stores; roll-out Fresh into Game; roll-out Food Retail stores; increase the rate of expansion in Africa; and open more low income home improvement stores in South Africa. More information relating to property, plant and equipment, goodwill and intangible assets can be found in note 12, 13 and 14 respectively.

6.Investors_9.2_CapitalExpenditure_2

All periods are 12-month periods.
* ‘Property Investments’ are included under ‘Investments and financial assets’.

 

Investments and other financial assets

Investments comprise a R117.4 million (Dec 2012: 104.0 million) participation in an international treasury, shipping and trading business unit, re-valued to reflect the foreign-denominated net assets within that business unit. The R110.0 million shown as a bare dominium revaluation in December 2012 represents the Group’s proportionate share of the estimated market value of the right to acquire bare dominiums in seven Makro stores in 2020. With effect from January 2013, Massmart acquired control of these Makro stores. Investments in insurance cell captives of R100.3 million (Dec 2012: R34.8 million) relates to insurance arrangements with Mutual & Federal pertaining to extended warranties sold within the Group and general insurance within the Group. More information relating to investments can be found in note 15.

Other financial assets of R290.9 million (Dec 2012: R126.5 million) include executive and employee loans of R46.7 million (Dec 2012: R70.6 million) owed by participants in the Massmart Employee Share Purchase Trust that attract zero percent interest. This loan amount reduces as employees sell their shares and repay the associated loans and increases where executives elect to own Massmart shares, funded with these loans, rather than options issued by the trust. The finance lease deposit of R21.9 million (Dec 2012: R33.0 million) relates to the financing of the Makro Strubens Valley store originally built in 2003. During the current financial year the Group purchased a property where transfer was not yet effected at year-end. Due to the time delay, the Group has placed the purchase price on deposit with the seller honouring the transaction. Once transfer is affected, the property will be recorded by the Group as land and buildings and the loan asset will be paid to the seller. More information relating to other financial assets can be found in note 16.

Deferred tax

The deferred tax asset arises primarily from numerous temporary differences, including tax deductions on trademarks, the operating lease liability arising from the lease-smoothing accounting policy, and unutilised assessed losses. This net asset will reduce over time as the associated tax benefits are utilised. Net deferred tax increased from R359.6 million at December 2012 to R585.5 million at December 2013. More information relating to deferred tax can be found in note 17.

Current assets

 

December 2013 December 2012
Rm Rm
Current assets 16,036.1 15,422.2
Inventories 10,115.5 9,691.5
Trade, other receivables and prepayments 3,712.5 3,681.7
Taxation 12.0 17.0
Cash and bank balances 2,196.1 2,032.0

 

 

Net inventories represent approximately 63.7 days’ sales (on historic sales basis), lower than the December 2012 comparative figure of 65.9 days. The 4.4% increase in stock on December 2012 indicates that inventory was well managed within the Group other than the over-stocked position in Massdiscounters given the slower comparable store sales in Game SA.

In general, Massdiscounters, being a retail discounter with 143 stores, with several stores in Africa with longer supply-chains, has the highest inventory levels and its sales days in inventory are almost double those for Massmart’s wholesale businesses (Makro and Masscash). Builders Warehouse also has higher inventory days than the Group average, given the broader and deeper merchandise range in its stores.

 

Net inventory days December 2013 December 2012
Group 63.7 65.9
Massdiscounters 109.3 108.7
Masswarehouse 59.2 59.9
Massbuild 92.3 80.1
Masscash 35.2 42.0

 

General Merchandise net inventory of R4,596.3 million (Dec 2012: R4,250.7 million) represents about 45.4% (Dec 2012: 43.9%) of total Group inventory and is the category holding the Massdiscounters overstocked position. Food net inventory at R2,857.5 million (Dec 2012: R3,068.0 million) is the second largest Group inventory category but with the fastest stock-turns. More information relating to inventories can be found in note 18.

Inventory by category net of provisions: December 2013 December 2012
Rm Rm
Food 2,857.5 3,068.0
Liquor 753.1 762.6
General merchandise 4,596.3 4,250.7
Home improvement 1,908.6 1,610.2
10,115.5 9,691.5

 

Total trade and other receivables, net of provisions, is 0.8% higher than December 2012 and is below sales growth. Included here are net trade accounts receivable of R1,822.8 million (Dec 2012: R1,692.9 million), which increased by 7.7%. The businesses continue to focus on keeping debtors within their terms. Although trade credit is offered to certain customers in Makro, Massbuild and in Masscash, it is well controlled, is insured with a credit risk insurer, and is kept within the Group’s parameters. Allowances for doubtful debts at year-end was 5.0% of total trade receivables (Dec 2012: 4.7%). Trade and other receivables are described in more detail in note 19.

Non-current liabilities

December 2013 December 2012
Rm Rm
Non-current liabilities 2,206.4 1,183.4
Non-current liabilities:
– Interest-bearing 1,178.7 671.8
– Interest-free 838.9 305.7
Non-current provisions 102.2 169.2
Deferred taxation 86.6 36.7

 

Major items included in the total of R2,206.4 million (Dec 2012: R1,183.4 million) are medium-term bank loans, capitalised finance leases, the operating lease liability arising from the lease-smoothing adjustment, non-current provisions and deferred tax.

The interest-bearing liabilities included in this category are medium-term bank loans. This balance increased substantially during the financial year as a R600.0 million, five-year, fixed-rate, bullet profile loan was raised at 7.5% from Walmart and a R275.0 million three-year, fixed rate external bank loan, was raised at 7.2%. In the 52 weeks to December 2012 a R750.0 million five-year, fixed rate, amortising loan was raised at 7.9%. Capitalised finance lease balances are R16.6 million (Dec 2012: R55.2 million). The largest balance in non-current non-interest-bearing liabilities is the net operating lease liability of R822.2 million (Dec 2012: R302.7 million) arising from the lease-smoothing accounting policy and which will be released over the remaining period of the Group’s operating leases. The large increase is in most part due to the release of the lease smoothing asset relating to the seven Makro stores that were leased but have now been purchased. More information relating to non-current liabilities can be found in note 23.

Included in non-current provisions is the long-term provision of R84.2 million (Dec 2012: R81.5 million) arising from the actuarial valuation of the Group’s potential unfunded liability, arising from post-retirement medical aid contributions owed to current and future retirees. With effect from 1999, post- retirement medical aid benefits were no longer offered to new employees joining the Group. The Supplier Development Fund constituted as part of the Competition Tribunal’s approval of the Walmart transaction has been recognised as a current provision and more information has been provided in note 26.

Also included in non-current provisions in the previous year are liabilities raised on business acquisitions relating to the long-term portion of the final cash settlement from the acquisition of Fruitspot, amounting to R64.7 million. More information relating to non-current provisions can be found in note 24.

 

Current liabilities

 

December 2013 December 2012
Rm Rm
Current liabilities 18,571.9 16,921.1
Trade and other payables 16,774.2 15,305.5
Current provisions 327.0 363.8
Taxation 331.3 298.5
Other current liabilities 531.6 561.2
Bank overdrafts 607.8 392.1

 

Included in the total trade and other payables figure are trade payables of R13,702.5 million (Dec 2012: R12,601.3 million) representing approximately 75.7 days of cost of sales (using the historic basis), which is slightly higher than the December 2012 comparative figure of 75.1 days. The figure is representative of the Group’s supplier terms and we continue to monitor this ratio very closely. Owing to payments to creditors being made shortly after each month-end, the Group trade payables balances at year-end are not representative of the average during the remaining financial period. The amount by which year-end trade payables are “overstated” in comparison to the average cannot be accurately calculated but is approximately R1.7 billion. More information relating to trade and other payables can be found in note 25.

Included in current provisions are liabilities raised on business acquisitions related to the short-term portion of the final cash settlements from the acquisitions of Fruitspot of R68.8 million (Dec 2012: R0 million) and the Rhino Group of R24.1 million (Dec 2012: R124.1 million). The Supplier Development Fund of R202.5 million (Dec 2012: R225.4 million) is reported on annually to the Tribunal highlighting our expenditure and achievements. More information relating to current provisions can be found in note 26.

The current taxation liability reflects the Group’s liability for provisional corporate tax payments that are generally payable within a few days of the financial year-end.
Other current liabilities of R531.6 million (Dec 2012: R561.2 million) include the short-term portion of the medium-term loans noted above. More information relating to other current liabilities can be found in note 27.

Contingent liabilities

There are no current or pending legal or arbitration proceedings, of which the Group is aware, which would have a material adverse effect on the Group’s financial position.

Commitments

 

Commitments in respect of capital expenditure approved by Directors:
December 2013 December 2012
Contracted for 1,249.3 954.8
Not contracted for 783.4 715.5
2,032.7 1,670.3

 

More information relating to these capital expenditure commitments can be found in note 30. Massmart has the right of first refusal on the sale of any shares by the minority shareholders in various Masscash stores. Historically Massmart has exercised this right. The amount to be paid in future, should Massmart exercise its rights, totals R309.6 million (Dec 2012: R370.5 million). Capital commitments will be funded using current facilities.

The Group is exposed to the following operating lease commitments:
December 2013 December 2012
Rm Rm
Land and buildings 14,410.7 13,348.1
Year 1 1,639.8 1,430.8
Years 2 to 5 6,164.5 5,537.4
Subsequent to year 5 6,606.4 6,379.9
Plant and equipment 12.1 12.8
Year 1 5.2 4.9
Years 2 to 5 6.9 7.9
Other 22.9 22.5
Year 1 11.0 10.2
Years 2 to 5 11.9 12.3
14,445.7 13,383.4

 

In the prior year, promissory notes of R208.9 million that represented commitments under non-cancellable operating leases entered into by Masstores (Pty) Ltd on behalf of certain Makro stores were included in operating lease commitments in land and buildings. The promissory notes have been reclassified from ‘operating lease liability’ to ‘promissory notes’ as a result of Massmart acquiring control of the leased properties in the current financial period. The final promissory note payment was honoured on 31 December 2013.

Other reserves

December 2013 December 2012
Rm Rm
Other reserves 517.6 323.3
Foreign currency translation reserve 104.5 57.3
Hedging reserve 6.8 1.7
Share-based payment reserve 708.2 579.2
Capital redemption reserve fund 0.2 0.2
Fair value adjustment of available-for-sale financial asset (13.2) (13.2)
Fair value adjustment on listed shares 7.5 4.0
Change in non-controlling interests 1.9 1.9
Cost of acquiring minority interests (302.3) (306.1)
Treasury shares (1.7) (1.7)
Post-retirement medical aid actuarial gain 5.7 -

 

 

Major items in other reserves include the share-based payments reserve of R708.2 million (Dec 2012: R579.2 million), the foreign currency translation reserve of R104.5 million (Dec 2012 R57.3 million) and the debit balance for cost of acquiring minority interests of R302.3 million (Dec 2012: R306.1 million). The cost of acquiring non-controlling interests comprises the costs paid for increasing the Group’s interest in a Group company above the company’s non-controlling interest balance in the statement of financial position. This was previously recognised in goodwill, and even though it is now recognised in other reserves, the balance will remain a debit balance.

On 1 October 2012, the final conversion for the beneficiaries of the Massmart Thuthukani Employment Trust took place. The employees had the option of converting their remaining share allocation into Massmart ordinary shares and continue to receive 100% of the dividend on their ordinary shares or they could sell their remaining share allocation and receive net proceeds after tax and selling expenses. The relevant share-based payment reserve was released to retained income as can be seen in the ‘Release of share-based payment reserve’ of R292.6 million in the statement of changes in equity. More information relating to other reserves can be found in note 22.

 

Statement of changes in equity
for the year ended 29 December 2013
Share capital Share premium Other reserves Retained profit Equity attributable to equity holders of the parent Non-controlling interests1 Total
Rm Rm Rm Rm Rm Rm Rm
Balance as at June 2012 2.2 750.6 - 614.7 - 2,989.4 4,356.9 207.9 4,564.8
Total comprehensive income - - 22.5 693.2 715.7 29.2 744.9
Profit for the period - - - 693.2 693.2 29.2 722.4
Other comprehensive income for the period - - 22.5 - 22.5 - 22.5
Dividends declared - - - (317.0) (317.0) - (317.0)
Net changes in non-controlling interests2 - - - - - (21.9) (21.9)
Distribution to non-controlling interests3 - - - - - (39.6) (39.6)
Cost of acquiring non-controlling interests4 - - (13.6) - (13.6) - (13.6)
Share-based payment expense - - 68.5 - 68.5 - 68.5
Share trust net consideration5 - - - (72.6) (72.6) - (72.6)
Release of share-based payment reserve (note 22) - - (292.6) 292.6 - - -
Release of amortisation of trademark reserve - - (76.5) 76.5 - - -
Treasury shares - 1.5 0.3 - 1.8 - 1.8
Balance as at December 2012 2.2 752.1 - 323.3 - 3,662.1 - 4,739.7 - 175.6 - 4,915.3
Total comprehensive income - - 61.5 1,283.0 1,344.5 59.1 1,403.6
Profit for the period - - - 1,283.0 1,283.0 59.1 1,342.1
Other comprehensive income for the period - - 61.5 - 61.5 - 61.5
Dividends declared - - - (913.4) (913.4) - (913.4)
Net changes in non-controlling interests2 - - 3.8 - 3.8 (7.2) (3.4)
Distribution to non-controlling interests 3 - - - - - (30.9) (30.9)
Share-based payment expense - - 129.0 - 129.0 - 129.0
Share trust net consideration5 - - - (121.8) (121.8) - (121.8)
Treasury shares - (8.8) - - (8.8) - (8.8)
Balance as at December 2013 2.2 743.3 - 517.6 - 3,909.9 - 5,173.0 - 196.6 - 5,369.6
1 The non-controlling interests comprise mainly CBW store managers’ holdings in certain Masscash stores.
2 Net changes in non-controlling interests represents the acquisition of non-controlling interests by the Group.
3 Distribution to non-controlling interests comprise dividends paid to non-controlling shareholders of a Group company.
4 Cost of acquiring non-controlling interests comprise the costs paid for increasing the Group’s interest in a Group company above the company’s non-controlling interest balance in the statement of financial position.
5 The share trust net consideration is the cost of buying shares in the market above the exercise price to meet the demands of the Massmart share schemes.

 

 

 

Statement of cash flows
for the year ended 29 December 2013
December 2013 December 2012 December 2012
53 weeks 52 weeks 26 weeks
Rm Rm Rm
(Audited) (Reviewed) (Audited)
Cash flow from operating activities
Operating cash before working capital movements 2,984.0 2,681.8 1,707.5
Working capital movements 752.6 (775.5) 1,110.0
Cash generated from operations 3,736.6 1,906.3 2,817.5
Interest received 28.7 90.0 45.6
Interest paid (283.8) (217.4) (106.0)
Dividends received 79.2 0.1 -
Taxation paid (732.8) (601.5) (369.1)
Dividends paid (913.4) (864.7) (317.0)
Net cash inflow from operating activities 1,914.5 312.8 2,071.0
Cash flow from investing activities
Investment to maintain operations (780.2) (650.0) (347.6)
Investment to expand operations (1,306.8) (685.2) (402.6)
Proceeds on disposal of property, plant and equipment 25.6 14.2 8.6
Proceeds on disposal of assets classified as held for sale 2.5 6.4 5.7
Investment in subsidiaries - (383.6) (56.9)
Disposal of subsidiaries - (50.7) (50.7)
Other investing activities (247.4) 84.2 82.3
Net cash outflow from investing activities (2,306.3) (1,664.7) (761.2)
Cash flow from financing activities
(Decrease)/increase in non-current liabilities 483.5 303.8 (159.8)
(Decrease)/increase in current liabilities (68.1) 1.6 (108.1)
Non-controlling interests acquired (0.6) (27.3) (27.3)
Net acquisition of treasury shares (121.8) (142.5) (72.6)
Net cash (outflow)/inflow from financing activities 293.0 135.6 (367.8)
Net increase/(decrease) in cash and cash equivalents (98.8) (1,216.3) 942.0
Foreign exchange movements 47.2 6.0 25.1
Cash and cash equivalents at the beginning of the year 1,639.9 2,850.2 672.8
Cash and cash equivalents at the end of the year 1,588.3 1,639.9 1,639.9

 

 

Operating cash performance remains resilient and increased by 11.3% to R2,984.0 million (52 weeks to Dec 2012: R2,681.8 million). This is a good indication of the quality of earnings of the Group. Cash released from working capital increased to R752.6 million (52 weeks to Dec 2012: (R775.5 million)). The improvement is a combination of an improved working capital performance across the business outside of Game SA; and the positive effect of the additional 53rd week.

December 2013 December 2012
Rm Rm
Working capital movements 752.6 (775.5)
Increase in inventories (424.0) (1,248.0)
Increase in trade receivables (30.7) (134.5)
Increase in trade payables 1,254.6 622.7
Decrease in provisions (47.3) (15.7)

 

Total tangible and intangible capital expenditure (replacement and expansion) was R2,087.0 million, an increase on the 52 weeks to December 2012 of R1,335.2 million (26 weeks to December 2012: R750.2 million). Capital expenditure is the highest in the history of the Group but is in line with the Group’s strategy of investing for the future. Excluding property acquisitions; capital expenditure as a % of sales was in line with expectations. Capital expenditure excluding property acquisitions, will slow down during the next 12 months as the Group begins to realise the benefits of its investments over the last few years. We will however continue to invest in the Group’s strategic drive to: own more of our key stand-alone properties; roll-out Food Retail stores; roll-out Fresh into Game; increase the rate of expansion in Africa; and open more lower-income home improvement stores in South Africa.

Investment in subsidiaries has been covered in the ‘Acquisition of subsidiaries and property’ paragraph. More information relating to the statement of cash flows can be found in note 37.

Financial risks

These are described very briefly below, however, more information relating to the Group’s financial risk management and related sensitivity analysis can be found in financial instruments note 39.

Liquidity risk

Liquidity risk is considered low owing to the Group’s conservative funding structure and its high cash generation. Massmart’s liquidity requirements are continually assessed through the Group’s cash management and treasury function. The Group has total banking facilities, incorporating overnight, short- and medium-term borrowings, letters of credit and forward exchange contracts of R7,235.7 million (Dec 2012: R5,428.6 million). As at December 2013, total interest-bearing debt amounted to R2.3 billion (Dec 2012: R1.7 billion). As the Group builds inventory levels for the festive season, net interest-bearing debt increases up to approximately R4.0 billion in October/November, but will reduce rapidly as Christmas trading accelerates with commensurately higher cash proceeds.

Interest risk

Interest rate exposure is actively monitored owing to the Group’s significant intra-month cash movements and the seasonal changes in its net funding profile during the financial year. As noted above, interest rates on the medium-term bank loans are fixed ranging between 7.2% and 8.1%. The remaining interest-bearing funding is financed through overnight facilities at floating interest rates. Of the Group’s total financial instrument liabilities of R18.4 billion, 85.7% or R15.8 billion is represented by non-interest-bearing trade and other payables funding.

Credit risk

Credit is available to wholesale customers at Makro, Massbuild and Masscash, and is adequately controlled by using appropriately trained personnel, applying credit granting criteria, continual monitoring and the use of software tools. A portion of the trade debtors’ book in Masscash is insured and a further portion is secured through general notarial bonds, pledges and other forms of security. Similarly, the trade debtors books in Builders Warehouse and Builders Trade Depot are also largely insured.

Currency risk

Where possible and practical, currency risk in the Group is actively managed. All foreign-denominated trading liabilities are covered by matching forward- exchange contracts. At financial year-end, there were open forward exchange contracts totalling R759.2 million (Dec 2012: R713.1 million) of which 98.0% (Dec 2012: 98.6%) were US Dollar liabilities. The sensitivity of the Group to this exposure is shown in note 39. In brief, using the US Dollar as a proxy for the Group’s total currency exposure, if the Rand strengthened by 10% (Dec 2012: 5%) from the period-end rate of R10.54/US Dollar (Dec 2012: R8.59/US Dollar), there would be a R4.6 million charge, while a 10% weakening would give rise to a R4.6 million gain (Dec 2012 equivalent figures were R3.9 million). The Group has increased the sensitivity calculation from 5% to 10% to appropriately reflect the large movement in the Rand in the current year.

Foreign-denominated assets are not covered by forward exchange contracts, as these are permanent assets held for the long-term. The Walmart creditor, whilst current in nature, has not been covered.

The Group’s exposure to the basket of African currencies has been explained in note 7 and further detail on the sensitivity analysis can be found in note 39.


Segmental review

Primary business segments

The Group is organised into four divisions for operational and management purposes, being Massdiscounters, Masswarehouse, Massbuild and Masscash. Massmart reports its business segment information on this basis. The principal offering for each division is as follows:

6.Investors_1_SignificantAccountingPolicies

for the year ended 29 December 2013
Total Corporate Massdiscounters Masswarehouse Massbuild Masscash
Rm Rm Rm Rm Rm Rm
Sales 72,263.4 - 16,740.6 19,675.1 9,583.6 26,264.1
Operating profit before interest and taxation 2,152.5 (37.9) 449.0 988.1 505.3 248.0
Trading profit before interest and taxation 2,145.4 - 366.6 990.2 507.6 281.0
Net finance (costs)/income (255.1) (349.6) 34.0 38.5 29.2 (7.2)
Operating profit before taxation 1,897.4 (387.5) 483.0 1,026.6 534.5 240.8
Trading profit before taxation 2,239.9 - 400.6 1,028.7 536.8 273.8
Inventory 10,115.5 12.6 3,647.2 2,618.2 1,597.0 2,240.4
Total assets 26,147.9 (2,614.7) 7,718.3 7,166.8 5,212.0 8,665.5
Total liabilities 20,778.3 (6,027.7) 7,522.2 6,587.8 4,857.4 7,838.6
Net capital expenditure 2,061.4 759.0 489.7 344.8 275.1 192.8
Depreciation and amortisation 731.1 33.9 256.4 145.4 121.2 174.2
Impairment losses 41.6 - - 2.1 - 39.5
Non-cash items other than depreciation and impairment 138.0 458.0 23.3 (352.2) 13.6 (4.7)
Cash flow from operating activities 1,914.5 399.4 990.1 273.9 356.9 (105.8)
Cash flow from investing activities (2,306.3) (1,424.0) (490.6) (385.2) (275.2) 268.7
Cash flow from financing activities 293.0 819.4 (621.6) 209.3 1.4 (115.5)
Inventory days 63.7 - 109.3 59.2 92.3 35.2
Number of stores 376 - 143 19 92 122
Trading area (m2) 1,481,308 - 475,331 195,794 410,546 399,637
Trading area (m2) increase on December 2012 4.8% - 7.7% 9.3% 3.7% 0.6%
Trading area (m2) increase on December 2012 (excluding re-measurements) 4.8% - 6.5% 9.3% 5.8% -0.2%
Average trading area per store (m2) 3,940 - 3,324 10,305 4,462 3,276
Distribution centre space (m2) 323,813 - 178,488 51,300 61,733 32,292
Distribution centre space (m2) increase on December 2012 11.4% - - - 108.4% 3.2%
Number of full-time equivalents 37,554 403 12,870 4,929 8,882 10,470
Number of full-time equivalents increase on December 2012 4.2% 28.3% -6.5% 27.9% 9.9% 4.3%
The corporate column includes certain consolidation entries.
All intercompany transactions have been eliminated in the above results.
Trading profit before taxation is earnings before corporate net interest, asset impairments, BEE transaction IFRS 2 charges, foreign exchange movements, loss on disposal of business, and assets classified as held for sale.
Net capital expenditure is defined as capital expenditure less disposal proceeds.

 

 

For the 26 week year ended December 2012
Total Corporate Massdiscounters Masswarehouse Massbuild Masscash
Rm Rm Rm Rm Rm Rm
Sales 36,122.6 - 8,422.1 9,630.2 4,663.1 13,407.2
Operating profit before interest and taxation 1,125.1 (214.9) 352.5 516.4 269.1 202.0
Trading profit before interest and taxation 1,427.1 - 426.5 518.1 271.0 211.5
Net finance (costs)/income (60.4) (131.8) 23.1 17.0 21.6 9.7
Operating profit before taxation 1,064.7 (346.7) 375.6 533.4 290.7 211.7
Trading profit before taxation 1,498.5 - 449.6 535.1 292.6 221.2
Inventory 9,691.5 31.2 3,406.2 2,376.9 1,321.6 2,555.6
Total assets 23,019.8 (3,462.5) 7,667.1 6,136.0 4,594.9 8,084.3
Total liabilities 18,104.5 (7,176.7) 7,492.7 6,299.1 4,236.5 7,252.9
Net capital expenditure 741.6 22.4 261.8 265.9 73.8 117.7
Depreciation and amortisation 342.6 9.4 128.1 62.0 61.6 81.5
Impairment losses 5.4 - - - - 5.4
Non-cash items other than depreciation and impairment 234.4 190.9 34.5 22.6 12.1 (25.7)
Cash flow from operating activities 2,071.0 1,545.9 37.2 100.9 102.4 284.6
Cash flow from investing activities (761.2) 54.9 (261.6) (253.2) (73.7) (227.6)
Cash flow from financing activities (367.8) (1,087.6) 388.0 249.1 (11.8) 94.5
Inventory days 59.9 - 99.7 53.6 73.7 38.8
Number of stores 359 - 133 18 85 123
Trading area (m2) 1,413,573 - 441,382 179,202 395,871 397,118
Trading area (m2) increase on June 2012 (excluding re-measurements) 4.7% - 5.8% 17.0% 0.5% 3.3%
Average trading area per store (m2) 3,938 3,319 9,956 4,657 3,229
Distribution centre space (m2) 290,704 - 178,488 51,300 29,624 31,292
Distribution centre space (m2) increase on June 2012 11.1% 314 5.6% 32.2% 0.0% 29.3%
Number of full-time equivalents 36,053 314 13,767 3,854 8,083 10,035
Number of full-time equivalents increase on June 2012 11.1% 0.3% 38.1% 9.5% 9.4% -10.8%

 

 

Secondary geographic segments

The Group’s four divisions operate in two principal geographical areas – South Africa and the rest of Africa.

Total South Africa Rest of Africa Total South Africa Rest of Africa
December 2013 December 2013 December 2013 December 2012 December 2012 December 2012
53 weeks 53 weeks 53 weeks 26 weeks 26 weeks 26 weeks
Rm Rm Rm Rm Rm Rm
Sales 72,263.4 66,676.1 5,587.3 36,122.6 33,503.5 2,619.1
Segment assets 19,238.5 18,320.0 918.5 16,719.2 16,218.3 500.9
Net capital expenditure 2,061.4 1,891.9 169.5 741.6 700.6 41.0
All inter-company transactions have been eliminated in the above results.
Segment assets excludes financial instruments and deferred taxation and reflects the geographic location of the Group’s physical current and non-current assets.
Net capital expenditure is defined as capital expenditure less disposal proceeds.

 

More information relating to segmental reporting can be found in note 40.

Related-party transactions

Related-party transactions comprise:

  • Transactions between the Company and its subsidiaries, which have been eliminated on consolidation and are thus not disclosed.
  • Compensation of key-management personnel.
  • Transactions between the Company and Wal-Mart Stores, Inc. (its ultimate Holding Company).
  • The Group holds cash reserves on behalf of the Group’s out-going Chairman, Lamberti Education Foundation Trust.
  • Loans to directors.
  • The post-retirement medical aid liability, Massmart Pension Fund and Massmart Provident Fund are managed for the benefit of past and current employees of the Group.

More information on related-party transactions can be found in note 33.

Directors’ emoluments

A detailed review can be found in ‘Our Employees’.
This information can also be found in note 34 and 35

Technical review

The appropriate accounting policies, supported by sound and prudent management judgement and estimates, have been consistently applied in all material respects with those of the previous financial year, except for:

  • IFRS 7 Disclosures – Offsetting Financial Assets and Financial Liabilities – Amendments to IFRS 7;
  • IFRS 10 Consolidated Financial Statements;
  • IAS 27 Separate Financial Statements;
  • IFRS 11 Joint Arrangements;
  • IAS 28 Investments in Associates and Joint Ventures;
  • IFRS 12 Disclosure of Interests in Other Entities;
  • IFRS 13 Fair Value Measurement; and
  • IAS  19 Employee Benefits (Revised).

No restatement was required in these financial statements and only IAS 19 Employee Benefits has a financial impact on the Group.

These financial statements have been prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS), its interpretations issued by the IFRS Interpretations Committee, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Council, the JSE Listing Requirements and the requirements of the Companies Act of South Africa. A technical review has been provided in note 2 of standards issued and not yet effective as well as standards that became effective in the current period.

Independent auditors

To align with Wal-Mart Stores, Inc. (Massmart’s ultimate holding company), Massmart changed its External Auditors to Ernst & Young Inc. with effect from the previous reporting cycle.

Critical judgements in applying the Group’s accounting policies

In the process of applying the Group’s accounting policies, management has not made any critical judgements that have a significant effect on the amounts recognised in the financial statements. Management applies judgement in classifying a lease as financing or operating at its inception.

Key sources of estimation uncertainty

The following areas highlight where estimation has been used in the Group financial results:
Property, plant and equipment useful lives and residual values
Goodwill impairment

  • Inventory provisions
  • Allowance for doubtful debts
  • Fair value of equity awards granted
  • Provision for post-retirement medical aid
  • Deferred tax assets – estimation of future taxable profit
  • Fair value measurement of financial instruments

More detail on estimation uncertainty is provided in note 42

Going-concern assertion

The Board has formally considered the going-concern assertion for Massmart and its subsidiaries and believes that it is appropriate for the forthcoming financial year. The going concern assertion can be found in the Directors’ report.

Appreciation

I would like to acknowledge and pay tribute to my Finance colleagues and their teams in the Massmart Divisions, the Massmart Corporate Office and Walmart for their continued commitment to the integration process and on-going demands of their Divisions and those of the Group. The significant effort and high-quality of their performance allows the Group to deliver results at an expected high standard to our various stakeholders.

 

 

_0005_Ilan_Zwarenstein_Signature.tif
I Zwarenstein
Group Financial Director

10 April 2014