Group performance including IFRS 16 in 2019

Massmart’s total sales for the 26-week period of R43.8 billion represents total growth of 5.5% and comparable growth of 3.6%. Margin pressure resulted in gross margin decreasing by 36 basis points, while expenses increased by 7.6%. This resulted in trading profit of R318.9 million, a decrease of 52% from the previous year period. African currency weakness resulted in foreign exchange losses of R157.1 million (2018: gain of R23.4 million), and increased average borrowings drove net interest expenses to R909.6 million. As a result of the above, Massmart incurred a net loss of R832.4 million, a decrease of 538.1% from the prior year profit of R190.0 million. Headline losses amounted to R796.6 million, a decrease from prior period headline earnings of R204.1 million.

Group performance excluding IFRS 16 in both years

The adoption of the IFRS 16 leasing standard from 1 January 2019 complicates performance comparisons between the results of the current and prior periods. 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, i.e. excluding the impact of IFRS 16 in both the current and prior periods. The like-on-like financial information must be read in conjunction with note 2.

Overview and environment

The difficult consumer economy in South Africa and in several sub-Saharan countries over the past six months has been well documented.  This adverse environment not only impacted sales growth but also caused pressure on gross margins and higher than expected expense inflation in certain areas.  In South Africa the severe load-shedding in February and March compounded the situation and undoubtedly contributed to the contraction in the first quarter’s GDP.  National Elections in two of the sub-Saharan countries where we have stores as well as extreme currency weakness contributed to the uncertainty and trading challenges.

Group overview

Massmart’s total sales for the 26-week period of R43.8 billion represents total growth of 5.5% and comparable sales growth of 3.6%, with year-to-date product inflation of 2.7%. Total sales from our South African stores for the period grew by 4.9% and comparable sales by 3.2%. Total sales from our ex-SA stores for the period grew by 6.4% and comparable store sales by 2.4% (both in constant currencies). Total ex-SA Rand sales increased by 11.8%.

The Group’s sales increased by 6.4% in Food (with inflation of 2.9%), 13.6% in Liquor (inflation of 5.3%), 5.0% in Home Improvement (inflation of 2.9%) and by 0.6% in Durable Goods (marginal deflation). In the second quarter to June 2019 there was a marked decline in sales growth in our non-Food categories whilst sales growth improved slightly in our Food and Liquor categories. Rand sales growth from our ex-SA stores also slowed in this quarter.

Gross margins declined from 19.6% to 19.2%, which was caused by the increased sales participation from the lower margin Food and Liquor categories.  Cash-strapped consumers continue to spend proportionately more on our sales promotion activities which causes further gross margin pressure.

With focus on expense management by the Group, expense growth across most of our major expense categories was mitigated, while other new expense pressures emerged as detailed below. Total expenses grew by 11.8% while comparable expenses increased by 9.2%. A net of 16 new stores have been opened since June 2018, representing space growth of 3.1%, which impacted employment, depreciation and occupancy costs. These three expense categories, representing 76% of total expenses, grew by 9.7% which approximates the sum of our space growth and cost-inflation but is higher than our sales growth of 5.5%. The balance of expenses, included in Other operating costs, increased by 19.3% which includes a combination of new store pre-opening costs, increased security costs, the cost of maintenance for generators during the two months of load-shedding, higher credit card costs from increased usage by customers, slightly higher bad debt provisions, and higher IT support costs.

The combination of soft sales, margin pressure and expense growth exceeding sales growth, caused Group trading profit before interest and taxation, to decline by 100.2% to a loss of R1.4 million. Headline earnings were a loss of  R550.0 million (2018: a profit of R204.1m).  Further detail on the income statement is provided in the Financial review.

Online sales are growing in Game but declined in Builders Warehouse and Makro. Builders Warehouse has annualised the impact of increased online sales relating to water harvesting materials in 2018 in this period, while at Makro lower online sales were as a consequence of a difficult conversion from the legacy online platform to SAP Hybris. Our efforts made towards expanding our omnichannel focus saw the Group increasing the number of articles available online by 20%, basket sizes increasing by 20% and now having 316 unique customer collection points. Click-and-collect expanded into Africa with Builders Warehouse launching their online sales platform in Botswana.

During the 26-week period, seven stores were opened and two were closed, resulting in a net trading space increase of 1.9% to 1,679,524m² and 441 stores at June 2019. A third Game store was opened in Kenya in July 2019, its first outside Nairobi. We remain on track to open another two stores for the remainder of 2019.

Financial review

Like-on-like performance

Massmart’s total sales for the 26 weeks ended June 2019 increased by 5.5% and comparable store sales increased by 3.6%. Year-to-date product inflation increased to 2.7% in June 2019.

Our ex-SA businesses represent 8.9% (2018: 8.4%) of total sales and increased by 11.8% in Rands (6.4% increase in constant currencies).

The Group’s 26-week like-on-like gross margin of 19.2% is lower than that of the prior period (2018: 19.6%), affected by promotional mix, lower contributions from General Merchandise sales and margin pressure from the deflation in Durable Goods.

Expenses increased by 11.8%, while comparable expenses increased by 9.2%.

Employment costs, the Group’s biggest cost category, increased by 8.6% against the prior 26-week period (with a comparable increase of 7.2%). The conversion of temporary contractors to permanent employees led to an 8% increase in full-time equivalents over June 2018 to just over 46,500. This conversion is in line with legislative requirements.

An additional net 16 stores opened since June 2018, increased municipal tariffs and electricity costs together with the severe load-shedding experienced in February and March have resulted in an increase of 8.7% of occupancy costs, and a comparable increase of 6.5%.

Depreciation and amortisation increased by 20.3%. In addition to the impact of new store openings, the implementation of the Hybris web and fulfilment platform in Makro has been completed and its related depreciation has commenced.

Other operating expenses increased by 19.3%. Contributing to this increase are the change management and training costs associated with the Makro Hybris web and fulfilment platform, increased security costs, increased credit card costs, slightly higher bad debt provisions as well as pre-opening store expenses of R53.5 million (2018: R18.6 million).

Trading profit before interest and taxation declined by 100.2% to a loss of R1.4 million. Operating profit before foreign exchange movements and interest declined by 108.7% to a loss of R47.9 million.

Included in operating profit before interest are net realised and unrealised foreign exchange losses of R81.9 million (2018: gain of R23.4 million), the majority of which arose as a result of the recent currency weakness mainly in Zambia and Nigeria.

Cash interest paid to the bank was R313.5 million causing net finance costs to grow by 17.8% to R353.1 million (2018: R299.7 million), largely due to increased levels of borrowing.

The Group’s effective tax rate is -21.3% (2018: 29.9%) which resulted in a tax charge of R102.9 million despite recording a loss before tax of R482.9 million. This charge is mainly as a result of impairing certain deferred tax assets previously recognised, in addition to a decision to limit the recognition of further deferred tax assets on year-to-date losses specifically relating to certain African jurisdictions.

Financial position

The commentary on our financial position has been provided taking into account the adoption of IFRS 16.

During the period investment spend was focused on new IT infrastructure, store openings and the refurbishment of existing stores, which was offset by depreciation charges and the transfer of a vacant immovable property to assets held for sale. As a result, the net book value of property, plant and equipment decreased by 3.2% from December 2018. Total capital expenditure was R695.7 million, with expansionary expenditure of R376.9 million relating to investments in IT systems and new store openings. Replacement expenditure was R318.8 million and included IT infrastructure of R156.9 million and store refurbishments of R56.2 million.

The inventory balance decreased by 9.0% to R11.1 billion from December 2018, mainly as a result of focused inventory optimisation while inventory days decreased by three days compared to June 2018. Trade receivables decreased marginally by 0.2%, which resulted in debtors’ days remaining static over June 2018. Creditors’ days decreased by four days to 56 days.

Operating cash before working capital movements, excluding the impact of IFRS 16, amounted to R659.1 million, 47.5% lower than the corresponding prior year period, caused by weaker operating performance. The cash outflow from working capital movements decreased from R5.1 billion in June 2018 to R4.4 billion in the current period, largely due to 2018 being impacted by investment into inventory to address critical stock levels at Masscash of approximately R500 million, in addition to a concerted and focused initiative to improve overall working capital.

Our people

We are always appreciative of the contribution of our 46,500 colleagues across sub-Saharan Africa, especially in the current environment where many of them and their own families feel the adverse consequences of the weak economy, increasing unemployment and ever-increasing cost of living. We acknowledge and thank our colleagues in all our stores, offices, DCs, and call-centres for their contributions, service and support.


On 27 May 2019, Phumzile Langeni was appointed the Lead Independent Director of the Board.

On 30 April 2019, Mohammed Abdool-Samad was announced as the Chief Financial Officer and Executive Director of the Board effective 1 August 2019.

Following the announcement of Guy Hayward’s intention to resign in May 2019, Mitchell Slape has been appointed as Massmart’s Chief Executive Officer and Executive Director effective 1 September 2019.

Strategic priorities

Allowing for a review of strategy implicit with the impending changes in management, the Group remains focused on longer-term strategic goals including:

  • Improving the profitability of Massdiscounters and Masscash;
  • Driving structurally lower operating costs;
  • Implementing a Group DC-services and -network function with the aim of reducing the cost-to-serve;
  • Investing in Online capabilities which now represent 0.8% sales participation of those categories that are online; and
  • Driving our valued-add-services customer offerings across the Group and which are growing in aggregate by 12% in 2019.

Given the Group’s current financial performance; our increased IT capital expenditure programme over the next few years; the likely muted South African economic growth in upcoming years; and the possibility of negative movements in future key South African macro-economic variables, the Group continues to selectively curtail new store growth and to focus on reducing operating costs and  working capital levels in order to reduce our cash and capital demands.

Outlook and trading statement for the year ended December 2019

For the 33 weeks to 18 August 2019, total sales amounted to R55.8 billion, representing an increase of 5.0% over the prior period. Comparable stores’ sales increased by 3.2%. Product inflation is estimated at 2.6%. 

It is difficult to envisage the South African consumer economy improving in the near-term and negative risks seem heightened in the international geopolitical and economic situation. Massmart’s profitability has always been heavily skewed towards the second half of the financial year and particularly the fourth quarter, which includes Black Friday and the Festive season, which makes near-term financial guidance difficult.

Assuming no further deterioration in the South African consumer economy for the remainder of 2019, Massmart expects that basic earnings per share for the year to December 2019 may be at least 50% below last year’s basic earnings per share of 410.6 cents per share on a comparable basis (excluding the impact of IFRS 16) and may be at least 100% below last year’s basic earnings per share of 410.6 cents per share (including the impact of IFRS 16). On the same basis, Massmart expects that headline earnings per share for the year to December 2019 may be at least 50% below last year’s headline earnings per share of 416.5 cents per share on a comparable basis (excluding the impact of IFRS 16) and may be at least 100% below last year’s headline earnings per share of 416.5 cents per share on a reported basis (including the impact of IFRS 16). A further announcement will be released once there is a reasonable degree of certainty on results in due course.

The financial information on which this outlook statement is based has not been reviewed and reported on by the Company’s external auditors.


Massmart’s dividend policy is to declare and pay an interim and final dividend representing a 2.0 times dividend cover unless circumstances dictate otherwise. As a result of the headline loss reported during this period, no interim dividend has been declared.

On behalf of the Board

Guy Hayward
Chief Executive Officer
Mohammed Abdool-Samad
Chief Financial Officer

28 August 2019