Performance highlights

R91,250.0 million
2015: R84,731.8 million
Operating profit before interest
R2,483.4 million
2015: R2,150.4 million
Headline earnings
R1,293.3 million
2015: R1,118.8 million
Total dividend per share
298.9 cents
2015: 258.2 cents

Financial performance

Massmart’s total sales for the year to December 2016 increased by 7.7% over the prior year, with comparable sales growth of 5.4%. Product inflation was estimated at 6.7%, suggesting a real comparable volume decline of 1.3%. Inflation in General Merchandise, Food & Liquor and Home Improvement increased to 5.9%, 7.7% and 4.7% respectively. Our non-SA businesses represented 8.7% (2015: 8.4%) of total sales and grew by 11.2% in Rands and 13.4% in constant currencies, while comparable sales growth in Rands from these territories was 3.1%.

Nineteen stores were opened and ten were closed, resulting in a total of 412 stores at December 2016. Net trading space increased by 1.2% from December 2015 to 1,568,744m².

The Group’s gross margin of 19.0% is marginally higher than that of the prior year of 18.9%, mostly driven from business-mix and better category management. Operating expenses were tightly controlled, increasing by 7.7% over the prior year, and great expense control resulted in comparable expense growth of only 5.4%. Pleasingly expenses as a % of sales were held at 16.4%.

Growth in employment costs, the Group’s biggest cost category, increased by 8.3% (with a comparable increase of 7.5%). Occupancy costs increased by 9.3%, mainly due to store openings. Depreciation and amortisation increased by 9.5%. Other operating expenses increased by 4.7%. The non-capital costs of upgrading our IT infrastructure, as well as pre-opening store expenses of R50.9 million (2015: R56.2 million), are included in this expense category.

Included in operating profit is the net insurance gain of R45.0 million arising from the excess of the insured replacement value over the net book value of the assets destroyed by the fire at the Jumbo Crown Mines store in February 2016.

Net realised and unrealised foreign exchange losses of R141.8 million (2015: loss of R149.8 million) are also included in operating profit. African currencies have been particularly volatile and mostly weaker during the year. We have been actively managing the value and currency of our foreign-denominated balances, where practicable, and we take out foreign exchange contracts on select exposures. All foreign-denominated inventory orders are automatically covered forward.

Excluding foreign exchange movements, earnings before interest, tax, depreciation and amortisation (EBITDA) of R3.7 billion increased over the prior year by 14.3%.

Net finance costs have grown to R571.9 million (2015: R475.3 million), mainly aggravated by two interest rate increases during 2016. The Group’s effective tax rate of 30.8% is in line with expectation (2015: 30.2%).

Headline earnings and headline earnings per share (EPS) increased by 15.6% and 15.8% respectively over the prior year. Adjusting for the effect of the foreign exchange movements in both years, Headline earnings and Headline EPS increased by 12.9% and 13.1% respectively.


Financial position

During the past few years, investment spending has been focused on new IT infrastructure, store openings, and the refurbishment of existing stores. The net book value of property, plant and equipment increased by 4.3% over the prior year. Total capital expenditure of R1.8 billion comprises: R0.8 billion on replacement expenditure including store refurbishments and our IT systems’ investments; and R1.0 billion on expansionary expenditure.

Interest-bearing borrowings increased due to a new term facility taken on in the year.

Operating cash before working capital movements amounted to R4.0 billion, a pleasing 17.7% higher than the prior year.

Improving inventory management saw our Inventory balance decrease by 1.1% compared to December 2015, with inventory days reducing by five days to 58 days, despite store openings. Trade and other receivables were in line with 2015 and so debtors’ days stayed flat, at nine days. Creditors’ days decreased to 70 days (2015: 76 days) due partly to the lower inventory levels and from early-settling some foreign-denominated creditor balances in non-SA countries to limit potential currency volatility.

Return on equity for the year improved to 22.0% (2015: 20.4%) and excluding foreign exchange movements, this figure was 23.6% (2015: 22.4%).