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Massmart Reports Solid Results

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Massmart Financial Results for 26 Weeks ended 26 December 2010

Massmart, Africa’s third largest distributor of consumer goods, has delivered solid first -half results, although the softer sales growth since Christmas suggests that the South African economy may not yet be in a sustainable recovery. .

Massmart reported a 13,3% increase in sales to R27 376 million and a 12,7% increase in operating profit before foreign exchange losses, during a period which saw the group’s product deflation reach record levels, while food deflation continued to make for challenging trading conditions in this category, particularly at Makro and Masscash. .

Once again, the Rand strength masked the performance of the Group’s African businesses, depressing Rand earnings and resulting in a foreign exchange translation loss of R79,5 million. .

Despite these factors, three of the Group’s four divisions performed strongly, growing trading profit at or ahead of sales growth. .

The low levels of food inflation allowed consumers to take advantage of the improved economic conditions and increase their spend on semi-durable and durable products. .

Massmart CEO Grant Pattison said a significant amount of time and resources had been committed to the Walmart transaction since it was first announced on 27 September 2011. .

“The approval by Massmart shareholders on 17 January 2011 and the recent positive referral by the Competition Commission give us confidence that the transaction is seen as positive for all stakeholders,” he said. .

The transaction remains subject to approval by the Competition Tribunal which is hearing the matter on 22 – 24 March 2011. Separate announcements have been, and will be, made by Massmart regarding this process. .

Financial Review

Total sales increased by 13,3% to R27 376 million
Comparable sales grew 7,3%. Product deflation was 2,9%
Gross profit of 18,06%, slightly higher than prior year’s 17,81%
Headline earnings and Headline EPS increased by 6,5% and 5,6% respectively; pre-forex increase: 13,1% and 12,1% respectively
Total expenses increased 16,2%, comparable expense growth of 7,8%
Cash flow from operations increased by 2,7% but after net working capital movements it declined by 13,7%
Return on equity of 30,8% at December 2010
Interim cash dividend of 252 cents per share, same level as interim dividend in 2010
Thuthukani dividend of 252 cents per share, equivalent to 100% of the ordinary dividend.

Strategic and Operational Review

Highlight of growth strategy – expansion into food retail through Cambridge, Game Foodco and Makro
Two new Game Foodco stores opened in Western Cape and trading above expectations; third to be opened shortly
Net trading space increased by 8,7% to a total of 1, 249, 584 m² and total stores stand at 308 following one store closure, 16 store openings and five store acquisitions
Ongoing investment in Supply Chain Development: Massdiscounters’ Gauteng Regional Distribution Centre opened; expansion of Makro Logistics services
Improved BBBEE rating from level 4 to level 3 contributor; scores increased from 66% to 76%; Massdiscounters’ score now at 80%

Massbuild performed well in a difficult market, recording an 18,6% increase in total sales and a 36,1% increase in trading profit. “With no real evidence of market growth during the period, market share gains are largely attributable to a superior customer offering,” said Pattison. .

The division expects to open its first African Builders Warehouse store in Gaborone, Botswana in July 2011, while discussions concerning the acquisition of the building materials business of Pupkewitz in Namibia were terminated after the Group was unable to reach agreement with Namibian authorities. .

Makro showed a 10,7% increase in sales and a 10,5% increase in trading profit during a period that saw the opening of the new format Makro Vaal store. The store includes a fresh produce and butchery offering designed to attract retail customers. .

Massdiscounters, which includes Game and DionWired, recorded sales growth of 14,4% and a 17,9% increase in trading profit. Game South Africa comparable store sales grew 12%, while Game Africa’s sales declined by 4%..

Masscash, the Group’s wholesale and retail cash and carry business, grew sales by 12,5%. Despite increasing volumes and maintaining trading margins, trading profit decreased by 15,5%, largely as a result of expense growth exceeding comparable sales growth, which made trading for the wholesale division particularly challenging. .

For the 34 weeks to 20 February 2011, total sales increased by 12,6% and comparable sales by 6,4%..

Commenting on the Group’s prospects, Pattison said: “Should the trends experienced in the Christmas period and the subsequent eight weeks continue, we expect a difficult second half. .

“Management will be focused on reducing stock levels, holding gross margins and containing costs, to continue growing annual operating profits, albeit perhaps at lower levels than those achieved in the first-half of this financial year.” .

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