Our 2018 performance

Total sales for the year grew 2.9% against a back-drop of a difficult economic environment, characterised by low GDP growth and constrained consumer confidence. Notwithstanding the difficult environment, Massmart maintained strong market shares and continued to resolutely focus on those factors within our control. Once again, expense management remained effective with comparable expenses, excluding restructuring costs, increasing by 2.3%.

Massmart’s performance in 2018 was impacted by deflation in commodities and Durable Goods; margin pressure in Game; and negative adjustments for inventory and cost of sales in Massfresh. Growth in total expenses, excluding restructuring costs, was limited to a creditable 5.0% (a comparable increase of 2.3%). This good performance was however insufficient to neutralise the pressure from soft sales, particularly over the crucial November and December 2018 period, and from slightly lower gross margins.

As noted in recent announcements, for statutory reporting purposes Massmart has adopted IFRS 15 using the ‘modified retrospective approach’, which has the unfortunate consequence in this financial year of complicating the ability to make useful comparisons with the prior period, particularly as Shield’s sales are included in revenue on a gross basis during 2017 and a net basis during 2018. To provide a more meaningful assessment of the current period’s performance, and unless otherwise stated, the commentary below has been provided on a like-on-like basis to reflect the material impact of IFRS 9 and IFRS 15 as though it was in effect for the period 26 December 2016 to 31 December 2017. In addition, the commentary below reflects Massmart’s performance for the current and prior years’ 52-week periods.


Massmart’s total sales for the 52 weeks ended December 2018 increased by 2.9% and comparable store sales increased by 1.2%. In the Group’s major categories, Food & Liquor sales grew by 3.3%, Durable Goods sales by 0.7% (with product deflation of 1.7%) and Home Improvement sales by 5.9%.

Product deflation was 0.2%. Inflation in Food & Liquor and Home Improvements increased slightly to 1.1% and 0.9% respectively, while Durable Goods went into further deflation of 2.1%.

Our ex-SA businesses represent 8.7% (2017: 8.6%) of total sales and increased by 3.7% in Rands (3.9% increase in constant currencies). Comparable sales in Rands declined by 1.9%.

The 2017 financial year was a 53-week period. Using the modified retrospective method per IFRS 15, relative to the 2017 53-week period, total sales for the 2018 52-week period of R90.9 billion represent a decline of 3.0%, with comparable store sales also declining by 4.7%.


The Group’s 52-week like-on-like gross margin of 19.45% is marginally lower than that of the prior year (2017: 19.63%), caused primarily by margin pressure in Game and Massfresh, which was partially offset by the increased sales participation of higher-margin retail customers in Massbuild. Margin was adversely impacted by negative adjustments for inventory and cost of sales in Massfresh.

Other income

Other income decreased by 1.7% to R231.0 million, mainly due to the decrease in dividends received from our cell captives. Other items in other income are financial services’ income, fair value adjustments on the cell captives and insurance proceeds on non-property, plant and equipment (PP&E) items.

Operating expenses

Expenses were well managed and increased by only 5.0% (excluding restructure costs), while comparable expense increases were limited to 2.3%. Expenses as a % of sales were 17.4% (2017: 17.1%).

Employment costs, the Group’s biggest cost category, were limited to an increase of 2.7%, due to a combination of improved staff scheduling in stores and DCs and a selective replacement of vacancies which resulted in full-time equivalent employees at just under 48,500. The opening of a net 13 new stores and the rental annualisation of Makro Riversands resulted in occupancy costs increasing by 10.1% (a comparable increase of 6.4%). Depreciation and amortisation increased by 3.2% over the prior year while other operating expenses increased by 5.8%. The non-capital costs of upgrading our IT infrastructure, as well as pre-opening store expenses of R57.8 million (2017: R43.5 million), are included in the other operating expense category.

Foreign exchange loss

Included in operating profit are net realised and unrealised foreign exchange losses of R2.7 million (2017: R39.9 million loss), the majority of which arose as a result of the strengthening of the average basket of ex-SA currencies. The impact was most noticeable in the strengthening of the Nigerian Naira and Mozambican Meticals during the year.

Net finance costs

Cash interest paid to the banks grew R31.7 million (a 6.2% increase), resulting in net finance costs growing by 10.0% to R623.7 million (2017: R566.8 million), largely due to the impact of a finance lease capitalised at the end of 2017 and net working capital increases.


The Group’s effective tax rate of 31.5% (2017: 29.9%) increased mainly due to assessed losses not utilised.

  December 2018 December 2017
% (Audited) (Audited)
Standard tax rate 28.0 28.0
Non-taxable income and disallowable expenses (3.1) 0.8
Assessed loss not utilised 6.9 3.2
Other – including foreign tax adjustments (0.3) (2.1)
Group tax rate 31.5 29.9


* Like-on-like 52-week basis 
^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to note 41.






Like-on-like Divisional operational review

LIKE-ON-LIKE DIVISIONAL OPERATIONAL REVIEW                                  
          Restated^                   Restated^    
  52 weeks       52 weeks       52 weeks   52 weeks       53 weeks    
  December 2018   % of   December 2017   % of   Like-on-like*   Comparable %   Estimated %   December 2017   % of
Rm (Audited)   sales   (Like-on-like)*   sales   % growth     sales growth   sales inflation   (Like-on-like)*   sales
Sales   90,941.6         88,356.0         2.9     1.2     (0.2)     89,869.7    
Massdiscounters   19,729.4         19,971.7         (1.2)     (1.5)     (0.6)     20,330.6    
Masswarehouse   28,778.2         27,311.9         5.4     3.7     (0.1)     27,748.9    
Massbuild   13,756.1         12,993.6         5.9     3.4     0.4     13,191.9    
Masscash   28,677.9         28,078.8         2.1     (0.2)     0.1     28,598.3    
Trading profit**   2,071.1     2.3     2,492.8     2.8     (16.9)             2,744.1     3.1
Massdiscounters   32.6     0.2     373.5     1.9     (91.3)             454.3     2.2
Masswarehouse   1,100.8     3.8     1,256.7     4.6     (12.4)             1,313.3     4.7
Massbuild   749.1     5.4     735.5     5.7     1.8             797.5     6.0
Masscash   188.6     0.7     127.1     0.5     48.3             179.0     0.6
^ Certain comparative figures shown do not correspond with the 2017 financial statements and reflect adjustments made. Refer to note 41.
* Refer to note 44 in the audited consolidated Group Annual Financial Statements.
**The ‘trading profit before interest and tax’ above is the amount per the condensed consolidated income statement less the BEE transaction IFRS 2 charge and excludes restructure costs.
# Group Sales inflation is a weighted inflation.



Divisional operational review

Massdiscounters saw year-to-date product deflation of 2.9% in December 2018 (2017: deflation of 2.5%), while total sales decreased by 1.2% and comparable sales were down 1.5%. In South Africa, Game’s total sales declined by 0.1% while comparable sales increased by 0.1%, an improved second half sales performance showing positive volume growth. Game Africa’s total sales in constant currencies increased by 1.5%, but declined by 0.9% in Rands, with trading conditions particularly difficult in Nigeria and Mozambique. DionWired’s sales were below those of the prior year from a combination of factors including limited product innovation and severe stock supply challenges, especially in laptops.

The organisational restructure and relocation of the Game head office incurred a cost of R116.1 million, with expected annual savings of approximately R30.0 million. Following the February 2018 announcement, the restructure and relocation took about nine months to settle. One disappointing consequence was that trading disciplines were not robust and about 1% of annual trading margin was foregone. This will be recovered during 2019.

Expenses were well managed and were only 1.6% higher than the prior year (a comparable increase of 0.6%). The softer trading margin and lower than expected December sales caused pressure on overall profitability resulting in Massdiscounters’ trading profit before interest and tax decreasing by 91.3% (excluding restructure costs) to
R32.6 million.

Masswarehouse benefited from the Division’s defensive product mix as total sales of R28.8 billion increased by 5.4% and comparable sales grew by 3.7%. The Division had product deflation of 0.2% in December 2018 (2017: inflation of 2.3%), caused by deflation in General Merchandise and Food commodities. Comparable sales growth in Food & Liquor was 3.3%, while General Merchandise sales growth grew by 4.5%.

Makro’s operating margin was well managed but the Masswarehouse result in the second-half was severely impacted by negative adjustments for inventory and cost of sales in Massfresh. This unsatisfactory development first came to light in November 2018 and more than 20 management and staff have already been replaced.

Expense growth of 9.2% (a 5.7% comparable increase) was higher than sales growth, partly as a result of the new Makro store opened in late 2017. Including the negative Massfresh adjustments, trading profit before interest and tax decreased by 12.4% to R1.1 billion.

Massbuild grew total sales by 5.9% to R13.8 billion, with comparable sales increasing by 3.4% and product inflation of 2.7%. In the second half of 2018 the South African business saw a decline in growth of contractor sales even as retail sales grew slightly – this trend has thus far continued into 2019. Assisted by new stores opened in 2017 and 2018, total Rand sales growth in our ex-SA stores was 14.1% while comparable sales growth was slightly negative.

The increased participation of higher-margin retail sales improved Massbuild’s gross margins. As a result of the net six new stores, total expenses grew by 8.1% but comparable expenses grew by only 3.6%. Trading profit before interest and tax of R749.1 million grew by 1.8%.

Masscash increased total sales by 2.1% to R28.7 billion, while comparable sales decreased by 0.2%. Product inflation increased from June 2018 to 0.3% as price deflation eased in commodities like maize, wheat, oil, sugar and rice. 

Sales in our Wholesale business grew by 2.3% and in our Retail business (Cambridge and Rhino) grew by 1.8%.

The organisational restructure and relocation of regional offices to Johannesburg was completed at a cost of
R44.9 million in the current year, with annual savings expected of R22.0 million. The trading benefits of this restructure began to show in the second half of 2018.

Expense growth was limited to 0.6% and good margin management resulted in trading profit before interest and tax increasing by 48.4% to R188.6 million.


Financial position

Non-current assets

During the past few years, investment spending has been focused on new Information Technology (IT) infrastructure, store openings, and the refurbishment of existing stores. The net book value of property, plant and equipment increased by 3.0% over the prior year. Intangible assets increased by 8.2% as a result of investments in IT.

The expansionary expenditure of R833.6 million included investments in IT systems and new store openings. Replacement expenditure was R772.4 million and included store refurbishments.

Working capital management

Operating cash before working capital movements amounted to R3.4 billion, 14.1% lower than the corresponding prior year and slightly better than the decline in earnings before interest, tax, depreciation and amortisation (EBITDA). Cash from working capital movements saw an outflow of R545.8 million compared to an inflow of R705.8 million in 2017, partly due to higher inventory levels in 2018 but also from the 2018 year-end calendar cut-off date being a day earlier. The inventory balance increased by 10.9% to R12.2 billion and inventory days increased by five days to 61 days compared to December 2017. Inventory has been raised in Masscash from a deliberate focus on improving service-levels and is slightly higher in Massbuild and Game from lower than expected sales in December. Debtors’ days increased by one day to 10 days and creditors’ days increased by three days to 81 days.

Capital management

Interest-bearing borrowings, including bank overdrafts, have increased by R558.2 million since December 2017. This movement is a result of the settlement of the R600.0 million medium-term loan with Walmart, as well as the R604.9 million settlement of our bank medium-term loans, offset by new finance leases. These term loans were replaced by an overnight bank overdraft facility due to more favourable terms and are included in our financing activities for the year.

During the post balance sheet period the Group concluded a medium-term loan facility agreement to replace a previous medium-term loan. In terms of this agreement, R600.0 million was advanced to the Group on 27 February 2019 and the loan will mature in two years at an interest rate of 8.27%.

The Group’s gearing ratio (debt: equity) decreased to 39.1% (2017: 52.4%) at the end of the current year. Return on average shareholders’ equity for the year decreased to 14.1% (2017: 22.1%).


Headline earnings before restructure costs decreased by 22.9% to R1.0 billion, while headline earnings decreased by 31.7% to R901.2 million.

Massmart’s current dividend policy is to declare and pay an interim and final cash dividend representing a 2.0 times dividend cover unless circumstances dictate otherwise. For the final dividend, Massmart’s Board has elected to declare and issue a scrip dividend or as an alternative, an election to receive a cash dividend. The Board has resolved to declare a distribution of fully paid Massmart ordinary shares with a par value of R0.01 each to ordinary shareholders. Alternatively, shareholders are entitled to elect to receive a cash dividend of 140 cents per ordinary share.

A gross final cash dividend of 208.0 cents per share (2017: 347.0) was thus declared out of income reserves as defined in the Income Tax Act, 1962, and the cash dividend will, unless exempt, be subject to the South African dividend withholding tax (DWT) rate of 20%.

Impact of IFRS16

The Group anticipates a material impact as a result of the adoption of IFRS 16 using the modified retrospective approach. The material impact relates to the capitalising of leased stores onto the Statement of Financial Position together with the corresponding lease liability. Whilst the impact on our numbers is material, business will continue as usual, as leasing of stores will continue as part of our business operations. Whilst there is a classification change between net operating and net financing cash flows, there is no impact on overall cash flow and the net cash position will remain neutral.

The new standard will not impact how we choose to finance our business nor will it distract us from our strategic priorities. Based on the current leases in the system, had we reported IFRS 16 in the 2018 52-week period we would have included a right-of-use (ROU) asset and lease liability of approximately R7.0 billion and R9.0 billion respectively on the Statement of Financial Position. For the same 52-week period, in our Income Statement for the 12-month period, we would have expected our earnings before interest and tax (EBIT) to increase by approximately R697.0 million, due to the reduction of the operating lease charge in occupancy costs, being less than the increased depreciation charge for the ROU asset, and a decrease of approximately R369.0 million in profit before tax (PBT) as a result of the increased finance charges on the leased liability. The overall decrease in earnings would primarily be a result of the relatively younger lease portfolio at the 2018 year-end.

Stakeholders are advised to exercise caution in the interpretation of the new leases standard and to refer to note 3 in the audited consolidated Group Annual Financial Statements.


During the IFRS 16 implementation project, an error in accounting was identified relating to a long-term lease of land. This 99-year lease arrangement that was entered into in 1994 (for the land on which the Makro Woodmead store is situated) was incorrectly accounted for as an operating lease and should have been accounted for as a finance lease together with an adjustment on the purchase price allocation of the 2013 acquisition of the Makro store on that land. As a consequence of this error, our lease commitment disclosure relating to the remaining non-cancellable lease payments has been updated in our results to include an additional R15.1 billion for both the 2018 and 2017 period, representing the lease commitments for the remaining 74 years on the lease. Between 2019 and 2033 R131.4 million is payable on these leases whereas the remaining 60 years post 2033 represents R15,015.6 million. The present value of the lease payments is R251.9 million. The error has been corrected by restating the comparative 2017 and 2016. Refer to note 41.


I would like to extend my gratitude to the finance teams across the Group, both at the Divisions and the corporate office, for their dedication, commitment and support especially in the current environment where many of them and their own families may be feeling the adverse consequences of the weak economy and high unemployment. Their hard work has enabled us to deliver quality financial results to our stakeholders. I am proud and privileged to have the opportunity to work with such an excellent team.

Johannes van Lierop
Chief Financial Officer
4 April 2019