Massmart surges over 8%, as turnaround gains traction

Market responds positively to news that the company has already reached over 65% of its cost saving target.
The group says its Game, Makro and Builders Black Friday promotions will run over the entire month of November. Image: Suren Naidoo, Moneyweb

Shares in JSE-listed retail and wholesale group Massmart surged 8.56% on Tuesday to close at R68, after the group reported in a Sens sales update that it has reached R1.3 billion of its R1.9 billion cost-savings target in the 39 weeks to September 26.

The market’s positive reaction to the news comes as the owner of Game, Makro and Builders Warehouse outlets progresses with its turnaround under CEO Mitchell Slape.

Read: Mitch Slape makes R8.18m investment in Massmart

This is despite the impact of the July unrest on the retailer, in addition to restrictions on alcohol sales during the trading period. It noted in the sales update that “overall retail sales were subdued in August following the July civil unrest as retailers assessed the damage and began to restore operations”.

Massmart said retail liquor sales were “particularly undermined” with it losing 110 days of liquor trading during the period.

“The Massmart turnaround plan continues to be implemented as scheduled and management is confident that despite the recent headwinds, the strategic growth initiatives announced are bearing fruit and we fully expect this to gain momentum and continue in the medium- to long term,” the group said in its Sens statement.

“This is clearly evident in cost-saving measures arising from our Smart Spend programme that has resulted in sustainable group-wide efficiencies arising from significantly improved ability to consistently leverage group-wide scale from a dedicated Indirect Spend Management team,” it added.

Sasfin senior equity analyst Alec Abraham told Moneyweb that the group’s turnaround strategy has great potential to bring it back to profitability in the short term.

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

“The recovery plan will also position the group far better to profit from sales growth in the medium term, as it will make the bottom line performance less reliant on high volumes … something that we have not seen in the SA market for some time now, as multiple years of economic mismanagement has eroded consumer wealth,” he added.

Sales performance

Massmart reported that its total sales for the period increased to R60.6 billion, marginally up (0.2%) compared with the prior year.

Its stores in South Africa accounted for the bulk of this performance, bringing in R55.4 billion in sales revenue for the 39-week period.

The Makro chain reported a positive sales performance, despite the division’s food sales being under pressure due to reduced activity in corporate, hospitality, restaurant and catering industries. Makro recorded a 10.8% increase in total sales for continuing operations, up to R19.9 billion, boosted by the increase in liquor sales (when restrictions were eased) and general merchandise sales.

“[Makro’s] Liquor sales for the 9-month period increased by 48.1%, with general merchandise sales increasing by 9.5%,” the group noted.

Massmart’s top-performing Builders Warehouse chain continued to show double-digit sales growth. Total sales within the chain came in at R10.9 billion, up 11.8% compared with the same period last year.

“Whilst most product categories in Builders have performed well, in particular we see strong sales in paint, home improvement, garden and patio goods, indicative of consumer’s ongoing focus on investing in their living spaces,” the group noted.

However, its Game retail chain continues to struggle, with the brand seeing sales decrease by 8.2% to R10.9 billion in the period.

Massmart said lower foot traffic at the country’s malls coupled with the major damage seen during the July unrest have contributed to the brand’s lack of performance.

Impact of July unrest

Massmart said in its update that the civil unrest in July in KwaZulu-Natal and parts of Gauteng is expected to cost the group around R2.5 billion.

The group noted that it is likely to suffer losses of R650 million, because its cover with the South African Special Risks Insurance Association (Sasria) does not cover the full extent of its losses.

Read: Sasria has paid out R5.8bn in July unrest claims so far

It said the material impact of the unrest is primarily due to the looting and extensive damage seen at two Makro stores in Pietermaritzburg and Springfield and two distribution centres in Riverhorse and Cato Ridge in KwaZulu-Natal.

Black Friday and the festive period

The group said it is well prepared for Black Friday and the December festive periods. It plans to extend its Black Friday promotions over the entire month of November.

“In the case of Black Friday we have, on the strength of customer feedback, extended the promotion to cover the full month of November across our Makro, Game and Builders trading banners all of which have, as part of our new ways of working, collaborated closely to leverage group-wide scale to negotiate deals that will deliver exceptional customer value whilst preserving margins.”

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