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Massmart continues to report a headline loss, but Slape’s turnaround takes shape

July unrest in KwaZulu-Natal saw group being hit by R1.3 billion in stock losses due to looting, which is likely to impact the second-half of its 2021 financial year.
Massmart's loss-making Game division continues to hurt the group's overall performance. Image: Suren Naidoo, Moneyweb

Despite showing some progress in its much-vaunted turnaround strategy, which saw Massmart report an HY2021 trading profit of R444.2 million compared to a loss of almost R267 million in HY2020 on Friday, the group is still in a net and headline loss position.

Massmart, which owns Makro, Game and Builders Warehouse stores, said its group-wide trading profit for the interim (26 weeks) period ended June 27, 2021, represents an increase of 266.6% from the comparative half year.

However, impairments, largely linked to its embattled Game chain, together with foreign exchange losses and interest expenses, continue to hurt the group’s overall financial position.

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“Impairment expenses of R597.7 million were recognised during the period. Foreign exchange losses of R87.9 million, decreased by 21.7% from the prior period. Interest expenses of R870.1 million decreased by 5.1% from the prior year due to decreased average borrowings and lower interest rates,” Massmart notes in its interim results Sens statement.

“As a result of the above, the group incurred a net loss of R1072.5 million, an improvement of 8.1% from the prior year loss of R1.166.8 million, over the same period,” it adds.

“The headline loss amounted to R645.4 million, a 40.8% improvement from the prior period headline loss of R1.090.3 million,” Massmart points out.

This shows that group CEO Mitch Slape’s turnaround plan is taking shape, but is being hobbled by challenges at Game, the recent unrest in KwaZulu-Natal and Gauteng, as well as the ongoing impact of the Covid-19 pandemic on SA’s retail sector.

The July unrest in KwaZulu-Natal saw the group being hit by R1.3 billion in stock losses due to looting, largely at its Riverhorse Valley distribution centre (Durban) and Makro stores in Springfield (Durban) and Pietermaritzburg.

President Cyril Ramaphosa, accompanied by national ministers and KwaZulu-Natal Premier Sihke Zikalala on an oversight visit in Durban in mid-July assessing the damage relating to unrest and looting at the Makro Springfield store. Image: Elmond Jiyane/GCIS

This setback will impact the second-half of Massmart’s 2021 financial year, as the unrest took place post its interim reporting period.

Massmart reported total group sales for the interim period of R41.3 billion, which represents comparatively modest total sales growth and like-for-like store sales growth of 4.4% and 4.8%, respectively.

Most of its JSE-listed peers are showing higher sales growth.

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However, Massmart noted in a results media statement that its gross margin had increased by 43 basis points while expenses decreased by 1.8% during the half-year.

“The group’s performance was supported by strong profit before interest and tax [PBIT] increases at Builders [up 184%] and Massmart Wholesale [which includes Makro], up 70%,” it said.

Massmart added that “it also benefitted from the positive impact of turnaround interventions” which included “improved gross profit margins and exceptional delivery against expense savings targets” that were aimed at “sustainably resetting the group’s cost base”.

“Group earnings were negatively impacted by non-cash impairment charges of R597.7 million, predominantly allocated to the Game SAP ERP software asset,” it pointed out however.

“The period has been characterised by continued group-wide expense control and margin growth. This, together with strong Builders home improvement and Makro general merchandise and liquor sales has contributed to a much improved trading profit performance,” Slape said in a statement.

“We achieved this in a demanding trading environment notable for: continued disruption to liquor sales, poor food, liquor and consumables demand amongst our core business-to-business hotel, restaurant and catering customer; and, constrained middle income discretionary spending on durable goods,” he added.

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