Massmart losses widen; forgoes dividend yet again

‘We’re in a good enough position that we’re actually increasing our capex spend going into this coming year in order to fuel the growth in the business’: CEO Mitch Slape.

RYK VAN NIEKERK: Massmart is one of the largest retailers in Africa, and operates 408 stores in 13 countries. The group owns several retail and wholesale chains, including Game, Makro and Builders Warehouse. The American retail giant Walmart, of course owns 51% of Massmart.

The group announced results today for the financial year to the end of December. Total sales from continuing operations were flat at R77.6 billion. The group however suffered a loss of R2.2 billion, which is 26% higher than the previous year’s loss.

Mitch Slape is on the line. He is Massmart’s chief executive. Mitch, thank you so much for joining me. It’s been a tough year, I think, for many retailers. There was the big impact of Covid-19, there was a civil unrest – which I know hit you quite hard – and there were also some supply-chain challenges. But a loss of R2.2 billion – how should shareholders and stakeholders feel about that?

MITCH SLAPE: I think that if you step back and you look at this past year, it’s a year like none other that I’ve experienced in my career. If you think about the impact of Covid and the civil unrest, we had product categories we were completely prohibited from selling. There was a 110-day prohibition on liquor in this last year. The unrest in July was massive. At one point in time we had 43 stores that were closed, some of them absolutely burnt to the ground, so we lost about R4.5 billion in sales as a result of those impacts; we lost about R666 million in profit – and that doesn’t include the impact of the ongoing supply-chain disruptions. Then we lost a couple of our main distribution centres in the company, including our primary import distribution centre in Durban. So we’ve been scrambling to kind of get that all put back together.

I think that the pleasing news, though, if you look at continuing operations for the business, is that comp sales were up; comparative with prior year for continuing operations we’re up by 3%. If you take out all of the noise of Covid and the unrest, we were actually up over 7% in terms of comp sales. So there’s a bright lining to it, but I think that the results were just distorted by what’s happened over this past year.

RYK VAN NIEKERK: The violence, especially, because that was absolute chaos in many ways. Did you do the calculation you referred to, lost sales and the loss, and how much of that did you recover through insurance?

MITCH SLAPE: On the insurance claims – and that includes damage to property, a variety of other things – we’ve been able to recover by working very closely with Sasria – about R1 billion in our insurance claim there. Then we also have an ongoing business-interruption claim that we’re still in the process of completing. We’ve collected R100 million on business interruption; we still have more room to go.

There’s quite a bit more that we’re still working through the claim on, but those insurance settlements are to not only cover lost sales and profit, but they’re also to cover, importantly, the destruction and damage to physical plants and facilities.

RYK VAN NIEKERK: Who are your insurers?

MITCH SLAPE: Sasria is our insurer in terms of the civil unrest – and that’s the billion rand claim. Then we have a business-interruption policy through Lloyds, and that’s our primary insurer there.

RYK VAN NIEKERK: You said if you strip it out, the operational performance was not too bad. I see that Game still reported an operating loss of around R1 billion. Game has always been a ‘problem child’. How would you label or describe Game’s performance in the context of the big rescue scheme you are busy with?

MITCH SLAPE: We’ve been hard at work on Game over the last few years. Game has been certainly one of the most challenging aspects of the turnaround so far. Our approach from the outset has been how we get this business back to centre and back to being a business that really contributes value to the overall portfolio. There’ve been a lot of interventions. We’ve relayed the entire South African portfolio; the stores have a new feel to them, so quite a different experience.

Then we’ve also put in place a lot of structural interventions so that we can set the table for Game for the future. I do think it plays a really important role for us potentially in the portfolio, as we continue to build out our e-commerce operations and become more of an omni-channel retailer in the future, having those locations. Giving the customers the option of coming in and doing all of that physically in the store or online is really important.

I guess the last thing I’d leave you with on Game, Ryk, is that if you look at the Game core portfolio and you know that we’re in the midst of exiting East and West Africa, [and] we’re in the midst of selling 15 non-core stores here in South Africa, I’m pleased with what I’m seeing coming out of the core. So we actually produced comp sales growth in excess of 3% in January. We saw much improved profit in January on that core group. So there’s a bright spot. I think that gives me some confidence that we’re getting Game to the right spot.

RYK VAN NIEKERK: Mitch, you took a bold decision a few years ago to close Dion Wired. Game also seems to be really struggling. Do you foresee, maybe, that there is a disposal on the horizon?

MITCH SLAPE: At this point in time I don’t believe so. We’re going to let Game run. We’ve made a lot of interventions now, and are moving into a period where I expect the business to deliver value. Hopefully we’re past all of the disruptions on the external market, hopefully past the lockdowns of any significance past the looting, past the rioting. We’re able to, I think, get a clean look at the core of the business and, if we can get to a point where we feel that core is really producing, then Game will re-take its place as a key part of the portfolio. Certainly that’s the vision for where we want to go.

RYK VAN NIEKERK: Your cash flow position also seems to have deteriorated. At the beginning of the year you had R3.2 billion in the bank and at the end of the year there was R690 million. Are you concerned about cash flows?

MITCH SLAPE: We’re not terribly concerned about cash flow in the sense that we still are throwing off cash from operations, and we have quite a bit of headroom in terms of the debt capacity of the company. We have very strong support from Walmart as our parent. That obviously was redoubled even further with Walmart’s agreement to convert part of the loan they had with us to a perpetual bond. So at this stage in the game we’re actually in a good position. Not only that, we’re in a good enough position that we’re actually increasing our capex spend going into this coming year in order to fuel the growth in the business.

RYK VAN NIEKERK: So where are you now in your turnaround plan, because there were a few headwinds last year? Do you need to reset that plan, or can you pick it up and just continue with it?

MITCH SLAPE: We continued to drive the turnaround plan through all of the unrest, and all of the challenges of Covid, with a lot of focus. Where we are is that every aspect of the turnaround plan is in implementation or has been implemented at this stage in the game. So really it’s just a question of execution and seeing things through all the way to the end. I have high confidence that we’ll complete all of that at pace, and now the focus for us as a business is completing that work and beginning to really zero in on growth.

That’s what we shared in the results presentation today – that we are going to grow aggressively in Builders, in Makro, in e-commerce and really begin to lean into that opportunity.

RYK VAN NIEKERK: Just lastly, e-commerce. How much did you sell via those digital channels?

MITCH SLAPE: Well, 2.2% of our total sales volume was in e-commerce. That’s up from about 1.8% in the prior year. Actually our e-commerce operation is one of the fastest-growing parts of our business. We saw gross merchandise value up by 56% for the total year, so it is fast-growing. We see an opportunity for that to grow rapidly as well in the coming years.

RYK VAN NIEKERK: Mitch, thank you so much for your time today. That was Mitchell Slape, the chief executive of Massmart.

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