Key points:

• Real volume growth in sales
• Sales mix improved trading margin
• Acceleration of profit before interest and tax growth vs. sales growth
• Well-controlled comparable expenses driving operational leverage
• Increased interest costs and foreign exchange losses
• Profit and HEPS for the year (before foreign exchange
movements (taxed)) increased by 11.1% and 7.8% respectively.

 

Performance highlights

 

 Positive profit gearing  Return on sales (ROS)  Return on equity (ROE)
gearing-02 ROS-02 ROE-02
     
Dividends declared per share and
headlines earnings per share (cents)
Net profit after tax per share and
dividends declared per share (cents)
 
 dividends-02-02-02  net profit-02-02  

 

 Performance against target

    2015 Actual   Local Retailer Benchmark
Sales growth %   8.39   8.65
Gross margin %   18.93   19.25
PBIT (excl. forex) growth %   14.10   17.50
ROE %   22.42   25.95
Inventory turn (times)   5.76   9.80

 

 

Summary Consolidated Income Statement

               
   
      December 2015   December 2014   %
Rm     (Audited)   (Audited)   Change
Revenue     84,857.4   78,319.0   8.3
Sales     84,731.8   78,173.2   8.4
Cost of sales     (68,689.6)   (63,610.8)   -8.0
Gross profit     16,042.2   14,562.4   10.2
Other income     125.6   145.8   -13.9
Depreciation and amortisation     (946.2)   (846.6)   -11.8
Impairment of assets     (25.7)   (24.6)   -4.5
Employment costs     (6,784.3)   (6,109.0)   -11.1
Occupancy costs     (2,865.6)   (2,678.8)   -7.0
Other operating costs     (3,245.8)   (3,033.3)   -7.0
Operating profit before foreign exchange movements and interest     2,300.2   2,015.9   14.1
Foreign exchange loss     (149.8)   (49.8)    
Operating profit before interest     2,150.4   1,966.1   9.4
– Finance costs     (507.7)   (386.8)   -31.3
– Finance income     32.4   41.5   -21.9
Net finance costs     (475.3)   (345.3)   -37.6
Profit before taxation     1,675.1   1,620.8   3.4
Taxation     (505.9)   (483.4)   -4.7
Profit for the year     1,169.2   1,137.4   2.8
               
Profit attributable to:              
– Owners of the parent     1,112.8   1,079.8   3.1
– Non-controlling interests     56.4   57.6   -2.1
Profit for the year     1,169.2   1,137.4   2.8
               
Basic EPS     513.5   497.8   3.2
Diluted basic EPS     506.1   492.9   2.7
Dividend (cents):              
– Interim     146.0   146.0  
– Final     112.2   275.0   -59.2
– Total     258.2   421.0   -38.7

 

 Owned vs. leased store sales

Lease-01

+ Sales

Despite the precarious South African economy and ebbing consumer confidence, total Group sales increased by 8.4% over the prior year, with comparable sales growing by 6.7%. Product inflation dropped from 4.8% in the prior year to 3.0%, as a result of commodity deflation experienced during the year and suggests real comparable volume growth of 3.7% in the current year. As the impact of the weaker Rand and the lack of rain is passed on in the form of an increase in food prices this year, we expect food inflation to increase. General Merchandise, Food & Liquor and Home Improvement inflation decreased over the prior year to 2.5%, 3.2% and 3.8% respectively. Sales in our other African businesses represented 8.4% (2014: 8.1%) of total sales and increased by 12.6% in Rands. The Group maintained or grew market share in each major category in which it trades during the year.

 Graph-1

A store is considered comparable in the 13th month of trading and is removed from the calculation of comparable sales from the first day of the month of closure.

+ Inflation
    December 2015   December 2014  
 %    52 weeks    52 weeks  
Group product inflation    3.0    4.8  
Food and liqour inflation    3.2    5.1  
Home improvement inflation    3.8    6.0  
General merchandise inflation    2.5    3.6  

 

More information relating to sales can be found in note 5 of the Group’s Annual Financial Statements

+ Gross profit

The Group’s gross profit of 18.9% is higher than the prior year of 18.6%. The Group’s gross margin is dependent upon the sales mix across the Divisions and the trading aggression occasioned by us and our competitors’ activity. Most of this increase is as a result of the portfolio effect where our highest margin business, Massbuild, grew sales the fastest. In addition, better margin management within Game also contributed to this increase. Gross profit includes rebates and other forms of income earned from suppliers.

Graph-2

 

 

 Massmart stores 2015 in numbers

21 Total new stores opened
5 New stores opened in Africa
403 Total stores
0.7% Net trading space increase
1.55
million
m² net trading space

 

 

storeAbove:Jumbo East London

+ Other income and operating expenses

Included within other income are dividends from unlisted investments. Total operating expenses (excluding foreign exchange movements) increased by 9.3% over the prior year. Comparable operating expenses were well-controlled and increased by 6.0%. Year-on-year, expenses as a percentage of sales has increased from 16.2% to 16.4%. The increase in total expenses is as a result of the Group’s continued investment in new stores (including five new stores in Africa); the acquisition of key properties during the second half of the prior year and first half of the current year; the investment in Food Retail (an additional 18 new/converted stores including a Food offering); the roll-out of SAP across some of the Divisions; and the development of an online platform for Massbuild SA. Occupancy costs increased by 7.0% (comparable increase of 4.4%). This is reflecting the impact of the recent acquisition of some of our key properties. In the year a net 11 new stores and one new DC were opened.

+ Operating profit before foreign exchange movements and interest

More information on activities within the four Divisions can be found here

+ Foreign exchange loss

As our African footprint has expanded, so too has our exposure to foreign currency fluctuations against the Rand. A portion of the current year’s foreign exchange loss stems from the weakening of the average basket of the Group’s African currencies relative to the Rand and US Dollar. In response to these movements, we are actively managing the size/value and currency of our foreign-denominated loan balances, where practicable, and we take out foreign exchange contracts on some key exposures. All foreign exchange denominated inventory orders are automatically covered forward.

During the current year the Group reassessed the designation of a number of our intercompany loans to our foreign operations in Africa, as per IAS 21 The Effects of Changes in Foreign Exchange Rates. As a result, certain loans were designated as part of the Group’s net investment in these foreign operations and the associated foreign exchange gains and losses have been recognised in the foreign currency translation reserve on a prospective basis.

Excluding foreign exchange movements, earnings before interest, tax, depreciation and amortisation (EBITDA) of R3.3 billion increased over the prior year by 13.3%.

Further detail on the Group’s foreign exchange exposure and foreign exchange risk management can be found in note 7 and note 40 respectively of the Group’s Annual Financial Statements

+ Finance costs

Year-on-year average interest-bearing debt (including bank overdrafts) increased to R3.5 billion (2014: R2.9 billion). The Group’s strategy to own our key properties, and our continued store expansion, have been drivers of the balance. More specifically, property transactions in the second half of 2014, which saw the acquisition of the previously lease-held Builders Warehouse Northriding store, Massmart Head Office, Makro Strubens Valley and a number of Masscash stores, occurred at an aggregate cost of R876.6 million. Over and above these acquisitions, property, plant and equipment has increased by R878.6 million during the current year as the Group continued to invest in new stores and to refurbish existing stores. The result of our higher level of debt throughout the current year, is that net finance costs have grown to R475.3 million (2014: R345.3 million), aggravated by two interest rate increases between the two year end dates.

 

 Graph-4

Further details regarding the Group’s finance costs and interest rate risk exposure and management can be found in note 9 and note 40 of the Group’s Annual Financial Statements respectively

+ Taxation and tax rate reconciliation

Taxation

The Group’s effective tax rate of 30.2% (2014: 29.8%) is in line with expectations. The main reason for the rate being above the standard 28% is the fact that we conservatively did not increase the deferred tax assets relating to specific assessed losses in some of our Divisions.

Tax rate reconciliation

       
    December 2015   December 2014
    52 weeks   52 weeks
%   (Audited)   (Audited)
         
The rate of taxation is reconciled as follows:        
Standard corporate taxation rate   28.0   28.0
Non-taxable income and disallowed expenses   0.3   2.8
Allowances on lease premiums and improvements   (0.2)   (0.1)
Assessed loss not utilised   2.6   2.0
Other (including foreign tax adjustments)   (0.5)   (2.9)
Group tax rate   30.2   29.8

 

Massmart is not concerned about any specific element of historical tax risk in the Group, but there remains the uncertainty that adjustments could arise from potentially unfavourable tax assessments of previous tax returns. Management believes that the final outcomes of any such matters will not have a material adverse effect on the Group’s financial position.

More information relating to taxation can be found in note 10 of the Group’s Annual Financial Statements

+ Headline earnings
             
                             
                    December 2015   December 2014   %
Rm                   (Audited)   (Audited)   Change
                             
Reconciliation of profit for the year to hadline earnings                            
Profit for the year attributable to owners of the parent    1,112.8    1,079.8    3.1
Impairment of assets    25.7    24.6    
Loss on disposal of tangible and intangible assets    2.3    1.4    
Profit on sale of non-current assets classified as held for sale    (5.2)      
Compensation from 3rd parties for tangible assets that were impaired, lost or given up    (1.2)      
Foreign currency translation reserve re-classified to the Income Statement    (12.7)      
Total tax effects of adjustments    (2.9)    (0.3)    
Headline earnings                    1,118.8    1,105.5    1.2
Foreign exchange loss after tax    111.0    35.9    
Headline earnings before foreign exchange movements (taxed)                    1,229.8    1,141.4    7.7
                             
Headline EPS (cents)                    516.3    509.7    1.3
Headline EPS before foreign exchange (taxed) (cents)                    567.5    526.2    7.8
Diluted headline EPS (cents)                    508.8    504.7    0.8
Diluted headline EPS before foreign exchange (taxed) (cents)           559.3   521.1   7.3
+ EBITDA and EBITDAR
           
  December 2015   December 2014      
  52 weeks   52 weeks      
Rm (Audited)   Audited   % change  
             
Operating profit before foreign exchange  2,300.2    2,015.9   14.1%  
Depreciation and amortisation  946.2    846.6   11.8%  
Impairment of assets  25.7    24.6      
EBITDA  3,272.1    2,887.1   13.3%  
Occupancy costs  2,865.6    2,678.8   7.0%  
EBITDAR  6,137.7    5,565.9   10.3%  
             

 

+ Summary consolidated statement of comprehensive income
             
   
    December 2015   December 2014   %
Rm   (Audited)   (Audited)   Change
             
             
Profit for the year    1,169.2    1,137.4    2.8
             
Items that will not subsequently be re-classified to the Income Statement    5.0    (8.9)    
Net post-retirement medical aid actuarial profit/(loss)    5.0    (8.9)    
             
Items that will subsequently be re-classified to the Income Statement    (21.2)    (55.2)     
Net foreign currency translation reserve    (24.2)    (53.7)    
Cash flow hedges – effective portion of changes in fair value    4.4    1.4    
Fair value movement on available-for-sale financial assets    (3.5)    (3.7)    
Income tax relating to components of other comprehensive income   2.1    0.4    
Total other comprehensive loss for the year, net of tax    (16.2)    (64.5)    
Total comprehensive income for the year    1,153.0    1,072.9    7.5
             
Total comprehensive income attributable to:            
– Owners of the parent    1,096.6    1,015.3    
– Non-controlling interests    56.4    57.6    
Total comprehensive income for the year    1,153.0    1,072.9    7.5

 

+ Reconciliation between trading profit and operating profit before foreign exchange movements, interest and taxation
    December 2015   December 2014
Rm   (Audited)   (Audited)
         
Profit before interest and taxation        
Trading profit before interest and taxation    2,349.7    2,061.7
Impairment of assets    (25.7)    (24.6)
BEE transaction IFRS 2 charge    (23.8)    (21.2)
Operating profit before foreign exchange movements and interest    2,300.2    2,015.9

 

+ Summary consolidated statement of financial position
             
    December 2015   December 2014   %
Rm   (Audited)   (Audited)   Change
             
Non-current assets   12,031.2   11,018.3    
Property, plant and equipment   8,117.8   7,239.2   12.1
Goodwill and other intangible assets   2,999.1   2,958.7    
Investments and other financial assets   165.1   158.2    
Deferred taxation   749.2   662.2    
Current assets   18,687.6   17,870.1    
Other current financial assets     229.3    
Inventories   11,934.5   11,228.8   6.3
Trade, other receivables and prepayments   4,697.4   4,288.3   9.5
Taxation   50.8   56.3    
Cash on hand and bank balances   2,004.9   2,067.4    
Non-current assets classified as held for sale   11.5   18.0    
             
Total assets   30,730.3   28,906.4    
             
             
Total equity   5,791.1   5,527.2    
Equity attributable to owners of the parent   5,636.0   5,334.4   5.7
Non-controlling interests   155.1   192.8    
Non-current liabilities   3,053.4   3,236.8    
Interest-bearing borrowings   1,819.6   2,133.9    
Deferred taxation   73.5   61.3    
Other non-current liabilities and provisions   1,160.3   1,041.6    
Current liabilities   21,885.8   20142.4    
Trade, other payables and provisions   20,077.7   18,518.9   8.4
Taxation   155.6   208.3    
Bank overdrafts   446.4   584.0    
Other current liabilities   1,206.1   831.2    
             
Total equity and liabilities   30,730.3   28,906.4    
+ Property, plant and equipment and other intangible assets

The net book value of property, plant and equipment has increased by 12.1% since 2014, mainly as a result of our investment in new stores and the refurbishment of some of our existing stores.

More information relating to property, plant and equipment and other intangible assets can be found in note 13 and note 15 of the Group’s Annual Financial Statements respectively

 

+ Acquisition of subsidiaries and businesses

In the current financial year upon the acquisition of Unison Risk Management Alliance Proprietary Limited, goodwill of R0.6 million arose. The acquisition of liquor businesses within the Massdiscounters Division resulted in goodwill of R6.7 million and the acquisition of general merchandising and food businesses within the Masscash Division a further R36.6 million. These business combinations are not considered to be significant.

Acquisition of subsidiaries and businesses including goodwill are described in more detail in note 4 and note 14 of the Group’s Annual Financial Statements

+ Investments and other financial assets

The Group sells extended warranties and places general insurance through vehicles facilitated by Mutual & Federal. In addition, the Group will sell credit life insurance through a vehicle by arrangement with Guardrisk. The cell arrangement was capitalised in the current year with no life products sold during the current financial year. The Group’s investment in insurance cell captives amounted to R139.2million (2014: R125.2 million).

The Group also holds other listed and unlisted investments to the value of R6.3 million (2014: R10.1 million).

At year end, interest-free Employee Share Trust Loans of R18.9 million (2014: R37.6 million) are owed by participants in terms of the old Massmart Employee Share Incentive Schemes.

During the current year the property loan of R214 million was realised when the Makro store to which it related was legally transferred to the Group.

More information relating to investments can be found in note 16 of the Group’s Annual Financial Statements
More information relating to the fair value of the above investments can be found in note 39 of the Group’s Annual Financial Statements
More information relating to other financial assets can be found in note 17 of the Group’s Annual Financial Statements
More information relating to the credit risk exposure and management of the above other financial assets can be found in note 40 of the Group’s Annual Financial Statements

 

 

Capital expansion composition

 

+ Fair value hierarchy

For financial instruments traded in an active market (Level 1), fair value is determined using stock exchange quoted prices. For other financial instruments (Level 2), appropriate valuation techniques, including recent market transaction and other valuation models, have been applied and significant inputs include market yield curves and exchange rates. For non-current assets classified as held for sale (Level 3) fair value has been determined based on the sale agreement. The table alongside reflects financial instruments and non-current assets classified as held for sale carried at fair value, and those financial instruments and non-current assets classified as held for sale that have carrying amounts that differ from their fair values, in the statement of financial position.

                                 
Rm   December 2015
(Audited)
  Level 1   Level 2   Level 3   December 2014
(Audited)
  Level 1   Level 2   Level 3
                                 
Financial assets at fair value through profit or loss    188.1      188.1      155.1      155.1  
– Investment in cell captives and other    139.3      139.3      125.2      125.2  
– FEC asset (de-designated)    48.8      48.8      29.9      29.9  
Financial asset designated as a cash flow hedging instrument    20.7      20.7      13.7      13.7  
– FEC asset    20.7      20.7      13.7      13.7  
Loans and receivables    13.9      13.9      30.3      30.3  
– Employee share trust loans    13.9      13.9      30.3      30.3  
Available-for-sale financial assets    4.9    4.9        8.4    8.4    
– Listed investments    4.9    4.9        8.4    8.4    
Non-current assets classified as held for sale    11.5        11.5    22.0        22.0
     239.1    4.9    222.7    11.5    229.5    8.4    199.1    22.0
                                 
Financial liabilities at amortised cost    2,522.0      2,522.0      2,653.0      2,653.0  
– Medium-term loan and bank loans    2,522.0      2,522.0      2,653.0      2,653.0  
Financial liabilities at fair value through profit or loss    5.6      5.6      4.5      4.5  
– FEC liability (de-designated)    5.6      5.6      4.5      4.5  
Financial liability designated as a cash flow hedging instrument    2.1      2.1      2.2      2.2  
– FEC liability    2.1      2.1      2.2      2.2  
     2,529.7      2,529.7      2,659.7      2,659.7  

 

There were no transfers of financial instruments between Level 1, Level 2 and Level 3 fair value measurements during the current or prior year.

More information relating to the fair value of the assets and liabilities reflected above can be found in note 39 of the Group’s Annual Financial Statements

+ Deferred taxation

The deferred tax asset includes the operating lease liability arising from lease smoothing, and unutilised assessed losses. This net asset will reduce over time as the associated tax benefits are utilised. The net deferred tax asset increased from R600.9 million at December 2014 to R675.7 million at December 2015.

More information relating to deferred taxation can be found in note 18 of the Group’s Annual Financial Statements

+ Inventory

Although inventories have increased year-on-year as a result of new stores, effective inventory management resulted in inventory days decreasing from 64 days to 63 days. Despite the significant focus on and efforts to clear older stock in Massdiscounters, the Division still has a considerable amount of work to do to achieve optimal inventory levels. Massdiscounters’ overstock position remains a priority for us in the upcoming year.

Inventory-Graph

 

Inventory composition

INVENTORY

 

More information relating to inventories can be found in note 19 of the Group’s Annual Financial Statements

 

Inventory composition

 

+ Trade and other receivables and prepayments

Excluding the FEC asset and the increase in amounts due from Walmart, trade and other receivables increased in line with sales. Despite the 9.5% increase in trade and other receivables, debtors’ days have remained stable at nine days.

Trade debtors is a key area of focus for management and there is no significant concentration of trade debtors.

Trade, other receivables and prepayments are described in more detail in note 20 of the Group’s Annual Financial Statements
More information on the Group’s credit risk exposure and management can be found in note 40 of the Group’s Annual Financial Statements

 

+ Non-current liabilities and provisions

Debt: Equity

Graph-3

Interest-bearing liabilities comprise mostly of medium-term bank loans (excluding bank overdrafts) and have remained flat at R3.0 billion. The Group’s gearing ratio (average debt:equity) increased to 54.6% (2014: 44.5%) at the end of the current year, in part as a result of base effects. This metric is calculated with debt averaged over two years as a numerator. In the two years since December 2013 we have invested significantly in capital expansion including a number of property acquisitions, some of which have already been highlighted. The annual rolling return on equity was 20.4% at December 2015 (2014: 21.0%). Excluding foreign exchange movements, this figure was 22.4% (2014: 21.7%).

The largest non-interest-bearing liability is the net operating lease liability of R1.0 billion (2014: R912.5 million) arising from the lease smoothing adjustment and which will be reversed over the remaining period of the Group’s operating leases. The increase in the operating lease liability is in most part due to the renewal of existing leases during the second half of the prior year and the first half of the current year at higher rates, as well as due to the roll-out of new stores.

At year end, the actuarial valuation of the Group’s potential unfunded liability arising from post-retirement medical aid contributions owed to current and future retirees amounted to R104.2 million (2014: R101.7 million), R2.8 million of which has been reflected as a current provision.

At the end of the current year, the Group’s onerous lease provision increased from R16.0 million to R23.4 million due to planned store closures.

More information relating to non-current liabilities can be found in note 24 of the Group’s Annual Financial Statements
More information relating to the Group’s liquidity risk management can be found in note 40 of the Group’s Annual Financial Statements
Further information relating to non-current provisions can be found in note 25 of the Group’s Annual Financial Statements

+ Trade and other payables and provisions

 Trade creditor days increased from 75 days to 76 days. The figure is representative of the Group’s supplier terms and we continue to monitor this ratio very closely.

The Supplier Development Programme, a separate fund created in response to the judgement of the Competition Appeal Court at the time of the Walmart transaction, had a closing balance of R111.6 million (2014: R157.2 million) and is reported on annually to the Competition Tribunal highlighting our expenditure and achievements.

More information relating to trade and other payables can be found in note 26 of the Group’s Annual Financial Statements

+ Other current liabilities

Included within other current liabilities are medium term loans of R463.9 million (2014: R249.7 million), the majority of which relate to foreign variable-rate bank loans. The increase in the current year relates to an additional US Dollar 9.5 million drawdown on an existing facility.

Also included is the current portion of medium-term bank loans and capitalised finance lease liabilities of R737.1 million (2014: R576.7 million).

More information relating to other current liabilities can be found in note 28 of the Group’s Annual Financial Statements

+ Lease exclusivity and contingent liabilities

We have previously disclosed various litigation and regulatory referrals related to restrictive lease clauses involving Massdiscounters/Game, three of the major food retailers in South Africa and certain South African landlords. Most of these proceedings are ongoing. During 2015 we received an adverse judgment in one of the interdict applications involving Pick ‘n Pay in the Supreme Court of Appeal. We successfully appealed this ruling to the Constitutional Court and our leave to appeal has been granted. The Competition Commission market enquiry into the potential anti-competitive effect of excluding new market entrants by means of lease usage and exclusivity clauses is underway. We have subsequently also proceeded to self-refer the matter to the Competition Tribunal and have named Pick ‘n Pay, Shoprite and Spar as respondents. If the conclusion of these proceedings is not in our favour – in whole or in part – then a adding the Fresh Food category to certain Game stores in certain localities in South Africa could be delayed or curtailed.

In addition to this matter, the Group is party to a variety of legal, administrative, regulatory and government proceedings, claims and inquiries arising in the normal course of business. While the results of these proceedings, claims and inquiries cannot be predicted with certainty, management believes that the final outcomes of these matters will not have a material adverse effect on the Group’s financial position.

More information relating to current provisions can be found in note 27 of the Group’s Annual Financial Statements

+ Commitments
    December 2015   December 2014
Rm   (Audited)   (Audited)
         
Commitments in respect of capital expenditure approved by Directors:        
         
Contracted for    953.4    864.1
Not contracted for    1,033.9    1,155.1
         
     1,987.3    2,019.2
         

Massmart has the right of first refusal on the sale of any shares by the non-controlling interest holders in various Masscash stores. Historically Massmart has exercised this right. All capital commitments will be funded using current facilities.

More information relating to these capital expenditure commitments can be found in note 31 of the Group’s Annual Financial Statements

+ Working capital movements
    December 2015   December 2014
    52 weeks   53 weeks
Rm   (Audited)   (Audited)
Net movement in working capital     372.0    (295.1)
Increase in inventories    (705.7)    (1,112.4)
Increase in trade receivables    (481.0)    (697.8)
Increase in trade payables    1,617.3    1,658.3
Decrease in provisions    (58.6)    (143.2)
         

 

The Group continually refurbishes its older stores and where possible builds its stores, and in doing so incurred expenditure of R1.7 billion (2014: R2.2 billion). Of this R1.0 billion (2014: R857.4 million) was replacement capital expenditure, whilst the balance of R0.7 billion (2014: R1.3 billion) was invested in new capital assets, including new stores and a DC. The reduction in expansionary capital assets can largely be attributed to the acquisition of the Masscash stores and three other key properties in the prior year.

Planned capital expenditure has begun 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 in line with Group’s strategic drive to: own more of our key properties; roll out Food Retail stores; grow online; increase our rate of expansion in Africa; and open more lower-income Home Improvement stores in South Africa.

As a result of the R1.2 billion increase in interest-bearing borrowings in the prior year, and our maintenance of this level of interest-bearing borrowings including bank overdrafts at R3.5 billion, cash flows from financing activities reflected an outflow of R25.5 million in the current year (2014: R1.3 billion inflow).

+ Summary Consolidated Statement of Cash Flows

Due to the high levels of trading experienced over the December holiday period, the Group banks a large amount of cash. This explains the large cash and bank balances reflected in the statement of financial position in both 2015 and 2014.
Cash generated from operations amounted to R3.8 billion, an improvement of 39.7% on the prior year, driven by improved profitability and working capital management.

The non-controlling interests comprise store managers’ holdings in Masscash stores and non-controlling interests in acquired Masscash businesses. These have reduced by R41.4 million during the year as a result of buy-outs of non-controlling interests

         
    December 2015   December 2014
Rm   (Audited)   (Audited)
         
Operating cash before working capital movements   3,384.4   2,983.4
Working capital movements   372.0   (295.1)
Cash generated from operations   3,756.4   2,688.3
Taxation paid   (631.0)   (683.4)
Net interest paid   (437.0)   (345.3)
Dividends received   40.3  
Dividends paid   (958.3)   (914.0)
Net cash inflow from operating activities   1,770.4   745.6
Investment to maintain operations   (983.7)   (857.4)
Investment to expand operations   (710.7)   (1,322.1)
Investment in subsidiaries and businesses   (16.9)   (14.4)
Proceeds on disposal of property, plant and equipment   38.7   32.5
Proceeds on disposal of non- current assets classified as held for sale   23.1  
Other net investing activities   3.9   14.9
Net cash outflow from investing activities   (1,645.6)   (2,146.5)
Net cash (outflow)/inflow from financing activities   (25.5)   1,349.7
Net increase/(decrease) in cash and cash equivalents   99.3   (51.2)
Foreign exchange movements   (24.2)   (53.7)
Opening cash and cash equivalents   1,483.4   1,588.3
Closing cash and cash equivalents   1,558.5   1,483.4
         

 

Further information relating to the movements in the cash flow statement can be found in note 38 of the Group’s Annual Financial Statements
Further information relating to the movements in the statement of changes in equity can be found in note 22 and note 23 of the Group’s Annual Financial Statements

+ Summary Consolidated Statement of Changes in Equity
                               
Rm   Share capital   Share premium   Other reserves   Retained profit   Equity attributable to owners of the parent     Non-controlling interests   Total
                               
Balance as at December 2013 (Audited)    2.2    743.3    517.6    3,909.9    5,173.0      196.6    5,369.6
Dividends declared          (914.0)    (914.0)        (914.0)
Total comprehensive income        (64.5)    1,079.8    1,015.3      57.6    1,072.9
Changes in non-controlling interests        (27.6)      (27.6)      (11.0)    (38.6)
Distribution to non-controlling interests                (50.4)    (50.4)
IFRS 2 charge and Share Trust transactions        125.1    (27.4)    97.7        97.7
Treasury shares acquired      (9.9)    (0.1)      (10.0)        (10.0)
Balance as at December 2014 (Audited)    2.2    733.4    550.5    4,048.3    5,334.4      192.8    5,527.2
Dividends declared          (914.1)    (914.1)        (914.1)
Total comprehensive income        (16.2)    1,112.9    1,096.7      56.4    1,153.1
Changes in non-controlling interests        (18.7)      (18.7)      (41.4)    (60.1)
Distribution to non-controlling interests                (52.7)    (52.7)
IFRS 2 charge and Share Trust transactions        218.5    (23.6)    194.9        194.9
Treasury shares acquired      (58.3)    1.2      (57.1)        (57.1)
                               
Balance as at December 2015 (Audited)    2.2    675.1    735.3    4,223.4    5,636.0      155.1    5,791.1

 

+ Segmental review

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:

  • Massdiscounters – general merchandise discounter and food retailer
  • Masswarehouse – warehouse club trading in food, general merchandise and liquor
  • Massbuild – home improvement retailer and building materials supplier
  • Masscash – food wholesaler, retailer and buying association

No single customer represented more than 10% of any of one of the Divisions’ sales in the current or prior financial year.

+ Business segment
                         
                         
 Rm    Total    Other    Massdiscounters    Masswarehouse    Massbuild    Masscash
December 2015                        
                         
Sales    84,731.8      19,514.1    23,675.9    12,010.6    29,531.2
Operating profit before foreign exchange movements and interest    2,300.2    (39.8)    235.4    1,198.7    693.6    212.3
Trading profit before interest and taxation    2,349.7      235.4    1,198.7    693.6    222.0
Net foreign exchange loss    (149.8)    (78.1)    (65.4)      (3.4)    (2.9)
Net finance (costs)/income    (475.3)    (292.6)    (49.5)    53.0    (100.7)    (85.5)
Operating profit/(loss) before taxation    1,675.1    (410.5)    120.5    1,251.7    589.5    123.9
Trading profit/(loss) before taxation    1,874.4    (292.6)    185.9    1,251.7    592.9    136.5
                         
Inventory    11,934.5    22.1    4,064.7    3,095.7    1,865.3    2,886.7
Total assets    30,730.3    (626.7)    8,234.5    8,314.0    5,122.1    9,686.4
Non-current asset held for sale    11.5    11.5        
Total liabilities    24,939.2    (4,608.9)    7,999.0    7,865.3    4,602.8    9,081.0
                         
Net capital expenditure    1,649.6    186.8    527.4    234.4    351.6    349.4
Depreciation and amortisation    946.2    62.0    336.0    169.5    184.8    193.9
Impairment losses    25.7    16.0          9.7
Non-cash items other than depreciation and impairment    316.6    101.7    133.0    39.7    6.6    35.6
                         
Cash flow from operating activities    1,770.4    450.6    276.1    259.0    1,095.1    (310.4)
Cash flow from investing activities    (1,645.6)    (183.2)    (527.2)    (234.4)    (351.6)    (349.2)
Cash flow from financing activities    (25.5)    (60.9)    166.2    (71.5)    (712.0)    652.7
                         
Inventory days    63.4      102.3    57.2    80.0    39.6
Number of stores    403      161    19    102    121
Trading area (m2)    1,550,719      533,078    195,794    449,133    372,714
Average trading area per store (m2)    3,848      3,311    10,305    4,403    3,080
Distribution centre space (m2)    346,660      178,488    58,475    60,235    49,462
Distribution centre space (m2) increase on December 2014   5.6%       14.0%   (2.4%)   34.9%
                         
                         
                         
 Rm    Total    Other    Massdiscounters    Masswarehouse    Massbuild    Masscash
December 2014                      
Sales    78,173.2      17,955.2    21,554.8    10,822.8    27,840.4
Operating profit before foreign exchange movements and interest    2,015.9    (30.6)    180.7    1,044.3    537.6    283.9
Trading profit before interest and taxation    2,061.7      180.7    1,044.3    537.6    299.1
Net foreign exchange (loss)/ gain    (49.8)    (48.4)    (5.8)      2.5    1.9
Net finance (costs)/income    (345.3)    (211.0)    (29.4)    44.4    (63.2)    (86.1)
Operating profit before taxation    1,620.8    (290.0)    145.5    1,088.7    476.9    199.7
Trading profit before taxation    1,716.4    (211.0)    151.3    1,088.7    474.4    213.0
                         
Inventory    11,228.8    30.5    3,984.9    2,845.7    1,785.6    2,582.1
Total assets    28,906.4    (325.6)    7,985.5    7,689.0    5,027.7    8,529.8
Non-current asset held for sale    18.0    15.0        3.0  
Total liabilities    23,379.2    (4,366.5)    7,820.9    7,312.1    4,730.6    7,882.0
                         
Net capital expenditure    2,147.0    967.8    542.2    70.3    296.8    269.9
Depreciation and amortisation    846.6    43.2    293.1    171.6    154.0    184.7
Impairment losses    24.6    9.4          15.2
Non-cash items other than depreciation and impairment    146.1    (16.2)    112.0    46.9    12.6    (9.2)
                         
Cash flow from operating activities    745.6    (446.2)    473.4    (103.8)    707.4    114.8
Cash flow from investing activities    (2,146.5)    (980.8)    (545.0)    (70.1)    (296.8)    (253.8)
Cash flow from financing activities    1,349.7    1,163.0    112.9    161.8    (369.3)    281.3
                         
Inventory days    64.4      107.6    57.1    84.6    37.1
Number of stores    392      153    19    100    120
Trading area (m2)    1,539,295      506,188    195,794    436,538    400,775
Trading area (m2) increase on December 2013 (excluding re-measurements)   3.9%     6.5%     6.3%   0.3%
Average trading area per store (m2)    3,927      3,308    10,305    4,365    3,340
Distribution centre space (m2)    328,175      178,488    51,300    61,733    36,654
Distribution centre space (m2) increase on December 2013   1.3%           13.5%
                         
                         
The other column includes consolidation entries.
All intercompany transactions have been eliminated in the above results.
Additional information can be found in ‘Our Customers’ and the ‘Chief Financial Officer’s Review’ in the Group’s Integrated Annual Report.
Trading profit before taxation is earnings before corporate net interest, asset impairments, BEE transaction IFRS 2 charges and foreign exchange movements.
Net capital expenditure is defined as capital expenditure less disposal proceeds.

 

+ Geographic segments

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

 
    December 2015   December 2014
    Total   South Africa   Rest of Africa   Total   South Africa   Rest of Africa
                         
Sales   84,731.8    77,579.2   7,152.6    78,173.2    71,822.4    6,350.8
Segment assets (Total)   23,387.8   21,541.2   1,846.6    21,764.8    20,226.3    1,538.5
Segment assets (Non-current)    11,128.4    10,118.7    1,009.7    10,197.9    9,576.5    621.4
Net capital expenditure   1,649.6   1,366.1   283.5    2,147.0    1,936.6    210.4
                         

 

More information relating to segmental reporting can be found in note 41 of the Group’s Annual Financial Statements

 

+ Related-party transactions

Massmart and its Divisions enter into certain transactions with related parties in the normal course of business. Details of these are disclosed in more detail in Massmart’s Annual Financial Statements. A net amount of R292.7 million remains unpaid to Walmart (2014: R206.2 million), which has been accounted for in ‘trade, other receivables and prepayments’ and ‘trade, other payables and provisions’. The Group has a medium-term loan with Walmart repayable after five years, on which interest of 7.46% is paid quarterly. The loan of R600.0 million is accounted for under interest-bearing non-current liabilities. As a 52.4% shareholder, Main Street 830 Proprietary Limited, a subsidiary of Walmart, will also be receiving the ordinary dividend based on their number of shares held.

More information on related-party transactions can be found in note 34 of the Group’s Annual Financial Statements

+ Directors’ emoluments

A detailed breakdown can be found in the Remuneration Report

+ Accounting policies, critical judgements and key sources of estimation uncertainty

These audited summary consolidated results 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 Standards Council, presentation and disclosure as required by International Accounting Standard (IAS) 34 Interim Financial Reporting, the JSE Limited Listings Requirements and the requirements of the Companies Act 71 of 2008 of South Africa. The accounting policies and methods of computation used in the preparation of these audited summary consolidated results are in terms of IFRS and are consistent in all material respects with those applied in the most recent Annual Financial Statements, as none of the amendments coming into effect in the current financial year have had a material impact on the financial reporting of the Group, besides impacting disclosure within the Annual Financial Statements.

More information on Directors’ emoluments can also be found in note 35 of the Group’s Annual Financial Statements
More detail on the Group’s accounting policies, critical judgments and key sources of estimation uncertainty is provided in note 1 and note 2 of the Group’s Annual Financial Statements

+ Dividend

In August 2015 Massmart indicated to shareholders that the Group’s future dividend policy would likely be changed to levels similar to South African retail peers. This adjustment was necessary as a result of significant property acquisitions between 2012 and 2015 and store growth into Africa which increasingly entail investing in real estate. Therefore, with effect from this dividend cycle, the dividend cover was amended to 2.00 x cover. A gross final cash dividend of 112.16 cents per share (December 2014: 275.00 cents), in respect of the year ended December 2015, was declared out of income reserves as defined in the Income Tax Act, 1962, and was subject to the South African dividend withholding tax rate of 15%. This was distributed to shareholders registered in the books of the Company on 18 March 2016.

+ 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

 

The year ahead

For 2016 and possibly 2017, the anticipated South African economic environment will heavily constrain consumer spending across several key Group categories including General Merchandise and Home Improvement/DIY, whilst our substantial Food and Liquor categories may perform relatively better. We expect there to be severe pricing pressure on lower-income households and we are resolved to keep our baskets affordable for those households.

As the new year unfolds, we continue to implement our strategic priorities and tackle our strategic, environmental and operational risks head-on.

We continue to focus on targeting new customer groups; experimenting with new formats; increasing our Private Label offering; reducing the cost of our value-chain; increasing our property portfolio; and reducing the cost of our new store openings.

Massdiscounters’ overstock position and profitability remains a priority for us in the coming year. The impact of the introduction of Food, the appointment of experienced key personnel, and the revision of our store segmentation and merchandise range in the current year is already evident as we see the profitability of Massdiscounters improve dramatically.

A key area of focus for us this year is to improve our working capital management, particularly in our African operations. We actively manage our positions, as the impact of our exposure to currency devaluations and foreign currency liquidity constraints in Africa becomes more prolific.

Our strategic priorities to improve profitability; roll-out our Retail Food proposition and Massbuild formats in South Africa; expand our African footprint and grow our online offering will continue to require extensive capital investment for which we are well positioned.

 

 

 

WE EXPECT THERE TO BE SEVERE PRICING PRESSURE ON LOWER-INCOME HOUSEHOLDS AND WE ARE RESOLVED TO KEEP OUR BASKETS AFFORDABLE FOR THOSE HOUSEHOLDS.
 

Appreciation

It has been a great year for Massmart in which we delivered some good growth in business performance as well as in our people. The team in Finance, made up of new and internally-grown talent, strongly supported the strong control environment in 2015 and further improved upon it. The challenge of making this Integrated Annual Report an even better one than last year was taken up and its fruits are visible for the reader.

The contribution and efforts of the Group Finance teams, both at the Divisions and the corporate office, have once again been outstanding.

I want to express my gratitude for their ways of working together as a team and putting business performance, as well as personal and collective development, at the same level. The result of this is fully to their benefit and to the advantage of all of our stakeholders.

 FD_sig

Johannes van Lierop
Chief Financial Officer
1 April 2016