Massmart CEO Guy Hayward conceded the group delivered a “disappointing” set of results for the 2018 financial year during its latest results presentation in Johannesburg on Thursday.
Africa’s second largest distributor of consumer goods and retailer buy revenue, which owns brands like Game, Makro and Builders Warehouse, posted a significant 31.7% decline in headline earnings. This saw it slash total dividends per share for the year by 40.1%, sending its share price almost 6.5% down by close of trade.
“Frankly, we disappointed ourselves and disappointed you our shareholders with these results,” Hayward told delegates at the presentation. “Nevertheless, we remain resolutely focused on the business and what is within our control, amid a challenging operating environment,” he added.
Massmart, which is majority owned by US retail giant Walmart, blamed SA’s difficult economic environment and constrained consumer confidence for its poor showing.
However, one-off restructuring costs of R161 million related to moving the head offices of its Massdiscounters division (operators of Game and DionWired) and Masscash (Jumbo, Rhino Cash and Carry and Cambridge Food) from Durban to Johannesburg also contributed to the decline in headline earnings.
Despite sales being up 2.9% to R90.9 billion, trading profit before interest and tax was down 16.8%, from R2.5bn (2017) to R2.1bn (2018). The group said ongoing deflation in food and durable goods further strained margins, putting pressure on its profitability.
However, Massmart’s outgoing CFO Johannes van Lierop, also noted that comparisons between the group’s 2017 and 2018 financial performance were “complicated”. He said this was due to changes in accounting standards around IFRS 9 and IFRS 15, which affected Masscash’s Shield buying club unit, “effectively taking out R4.5bn from the group’s sales numbers” in 2018. He added that Massmart also had a 52-week trading year in 2018, compared to 53 weeks 2017.
Van Lierop said Massmart’s restructuring costs, to relocate its Massdiscounters and Masscash divisions to Johannesburg, would result in R52m in annualised savings for the group. He said lower sales in the key trading months of November and December, consequently resulted in higher inventories.
Hayward told Moneyweb that moving its Massdiscounters and Masscash divisions from Durban to Johannesburg was not an easy decision, but would deliver long-term benefits by having all Massmart’s divisions together in one city.
Moneyweb understands that the move did not go down well with Massdiscounters and Masscash head office staff in Durban. There were staff cuts as many staff chose not to relocate to Johannesburg.
Hayward conceded: “Profitability at Game disappointed us the most. The business reorganisation and change process (at Massdiscounters) saw a distraction in the division. There was a hiatus that did affect trading margins.”
The growth of Game, especially in the African market, is a major part of Massmart’s plans. Hayward said he believed Massmart would be able to claw back the annual trading margin of 1% that was forgone last year due to changes at Massdiscounters.
“With the challenging economic conditions in SA, we will continue to be cautious on new store growth and focus on increasing footfall within our stores. However, we have several new stores planned for our operations in the rest of Africa. Besides Game, we plan to open Builders Warehouse stores in Kenya,” he said.
Over the medium three-year period, however, Massmart plans to increase store numbers by more than 10%. It has 436 stores in 13 countries in sub-Saharan Africa. Massmart said 47 new stores would be opened between 2019 and 2021, with more than 32% of this space being beyond SA’s borders, largely in Kenya and Zambia.
Massmart’s capex last year came in at R1.6bn, the lowest in four years. Hayward said capex for this year would remain around this level, with more than a third going into IT software and infrastructure investments.
Speaking to Moneyweb, he said one of Massmart’s single biggest investments and store openings this year was still in SA, with a new Makro store opening this month (March) within Tongaat Hulett’s new Cornubia precinct, north of Durban.
At 19,000m2, it will be the largest Makro store in KwaZulu-Natal and is being developed by JSE-listed Fortress Reit to the tune of around R350m. Massmart would be leasing the premises from Fortress, however, Hayward said the retail group will be spending between R50m-R100m to fit out the store. He said it was located in a major growth node and would target the Umhlanga and North Coast market.
Commenting on Massmart’s results, retail analyst Chris Gilmour, said trading margins within the group particularly at Game fell “as management took its eye off the ball” due to the restructure. However, he said the Massdiscounters move would be a non-recurring item.
“They’ve taken the pain and the relocation should deliver benefits for Massmart over time. Game’s head office in Durban goes back to when it was led by Don Barrett and was a separately listed group more than 20 years ago. Since it was taken over by Massmart, it has become a key part of the group’s growth strategy. The move of the head office to Johannesburg makes sense as you can’t have two centres of operation, especially with its African growth plans,” he added.
Gilmour said the MassFresh food side of the business was also a problem for Massmart during the year. “While management did not go into detail at the presentation, I understand that some 20 people were fired there,” he added.
“Since Walmart took over the group things have not been great, but I think Massmart is getting on the right track now and will benefit when the SA economy turns. It still gets 90% of its business from SA, so the fact that we are in one of the worst retail trading environments since the 1980s does not help. Massmart also seems to be doing better in Africa than some of its SA peers and has the lowest cost base of any retailer,” said Gilmour.