Massmart devotes majority of 2022 capex to new growth, amid persisting losses

Group looks to pursue growth both in e-commerce and on the ground by increasing its Makro and Builders store footprint.
The group's share price closed over 7% down on Monday, following the release of its latest full-year results. Image: Moneyweb

JSE-listed retailer Massmart Holdings will allocate 72% of its 2022 capital expenditure budget to investments in e-commerce and growing its Builders Warehouse and Makro store footprint, as part of the loss-making group’s plans to hunt for growth.

Over the next five years, Massmart says it is looking to increase its Builder’s footprint by 50%, hoping to boost sales by R1 billion. As for Makro, the group aims to increase store footprint by 25%, with potential sales growth of between R5 billion and R7 billion over the period.

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Massmart’s new investment plans come after the company decided to halt capital expenditure on projects and preserve cash in 2020 in an effort to alleviate the pressures of the Covid-19 pandemic on the business.

“Our prospects for growth are compelling and are based on a realistic market assessment that plays to our core strengths,” Massmart CEO Mitch Slape says in a statement linked to the group’s release of its full-year results ending December 2021 on Monday.

“We are rapidly deploying financial and people resources, with e-commerce technological assistance from Walmart, to take full advantage of the market opportunities before us,” he adds.

Read: Massmart losses widen; forgoes dividend yet again

With the help of parent company Walmart’s e-commerce technology stack, Massmart says it is looking to grow its gross merchandise value (GMV) by between 50% and 65% each year, for the next five years.

Sobering results

Covid-19-induced restrictions on liquor trading as well as lost sales from stores damaged during the July unrest and unrest-related supply chain problems continue to have an effect on the group’s full-year earnings.

The loss of 110 days of alcohol trading as well as the impact of the July riots and unrest on 43 of its stores resulted in R4.5 billion in lost sales.

“Civil unrest in July led to the closure of 43 stores that sustained various levels of damage, resulting in lost sales of R2.7 billion,” Massmart says.

Read:
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“A 110-day Covid-19 prohibition on liquor trading resulted in R1.8 billion in lost sales. We estimate the combined lost sales margin associated with these events to be R666.1 million,” the group adds.

Cost-saving efforts

Massmart reported that it has for the period delivered total savings of R1.6 billion against the group’s three-year target of R1.8 billion, Massmart also announced ambitions to increase this target to about R2 billion.

Sasfin senior equity analyst Alec Abraham tells Moneyweb that Massmart’s latest results indicate a turnaround strategy that is bearing fruit. He adds that a look at the company’s numbers without the distractions of negatively compounding events, he is confident that the business will do well in the medium term.

“I think they are making a definite positive move on Game, certainly from a profitability point of view and on the cost-savings, they are achieving their goals and are looking to extend [their targets].”

“I believe that there is significant turnaround to do in the business that’s going to improve the profitability before we improve sales. So, I am cautiously optimistic on these results, I think the medium-term future looks positive for the group.

Worsening losses

Massmart reported a 25.7% increase in losses for the current period to R2.2 billion, compared with losses of R1.8 billion reported in the previous comparable year.

Further, total group headline losses widened 65% for the period to R1.52 billion, compared with that of R924.3 million seen in 2020.

Total group sales also dropped by 1.9% compared with the previous period to R84.9 billion, while comparable store sales saw 1.7% growth.

Despite the drop in key metrics and a weaker sales performance, Massmart’s CEO says the group remains focused on driving the group’s turnaround.

Turnaround has not been ‘derailed’

“Our sales performance has been challenged by external events that have significantly impacted our high-contribution general merchandise and liquor categories. It has not however derailed our turnaround momentum, the positive impact of which is becoming evident in our continuing operations performance,” Slape says.

When including the impact of the inventory write-downs as a result of the civil unrest, Massmart reports a 191-basis-point drop in gross margin to 18.5%.

The group’s Game store segment continues to struggle, with total sales for the 52 weeks under review down 8.7% compared with the previous comparable period, dropping to R15.5 billion.

The group says Game’s sales were impacted by global supply chain challenges, which were compounded by the events of the July unrest. This “resulted in insufficient in-stock levels in the home electronic and small and large appliances categories”.

Read: Game plans to revamp its homeware business

Makro and Builders Warehouse stores reported a better performance than sister-brand Game, with total sales for the two increasing during the period.

Builders increased its total sales by 7.1% to R14.9 billion, while Makro saw a 6.7% rise in total sales to R28.3 billion.

Massmart says it will be withholding dividends again this year in order to preserve cash.

The group’s share price plunged over 13% (trading around R42.04) in morning trade on Monday, following the release of its latest full-year results. However, it pared some of the losses to close just over 7% down at R44.92.

According to Abraham the early morning plunge in Massmart’s share price was due to the larger than expected dip in earnings but he believes that the stock will recover once the market gets the chance to digest the company’s financial and mute out the impact of the uncontrollable variables.

Massmart share price

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