Massmart gives notice of 26% drop in profits

Massmart has warned investors that half-year profits are expected to decline by 26%.

On Monday, the group owned by US retailer Walmart said it expected half-year headline earnings per share — excluding restructuring costs at Massdiscounters and Masscash — of 124.7c to 141.5c, down from a restated 168.5c a year earlier.

Alec Abraham, senior equity analyst at Sasfin Wealth, said, “The reality is that Massmart operates a high-volume, lowmargin business model in a steadily rising inflation environment. But what we have seen is quite the opposite. We have seen low volumes coming through from them, we’ve seen deflation in a number of their categories. It’s been very difficult in that environment,” he said.

Earnings for the six months to June, including restructuring costs, are expected to fall by as much as 50% to about R184.7m.

Analysts have raised concerns about Walmart’s growth strategy for Massmart.

Thabiso Mamathuba, an investment analyst at FNB Securities, said the last few years would have been tough for e Massmart, with strategy probably not solely to blame. “The strategy of diversifying its business away from just durables is a good one and will make the group more defensive,” she said.

Since the competition authorities’ approval of Walmart’s acquisition in 2011, Massmart’s share price has declined by as much as 16%.

“It’s unfortunate that since Walmart bought the business, the volumes haven’t been here in SA and it’s been difficult to make money at this moment. If you look at the compound growth rate over the seven-year period, it’s practically zero,” Abraham said.

THEY ARE REALLY RELYING ON THE ECONOMY AND CONSUMER SPENDING PICKING UP

He said the economy would dictate whether Massmart would manage to turn around its business. “They are really relying on the economy and consumer spending picking up. There’s very little else they can do in terms of that … but I don’t know whether Game is still relevant in the market currently.”

However, “they are restructuring, they are trying to reduce headcount and they have moved their head office”, he said.

“It needs to find its relevance in the market. I don’t know if it has a place in the market,” Abraham said.