New veteran executive to help in Massmart recovery
MASSMART’s share price melted by 19.19 percent on the JSE yesterday after the troubled retailer warned that its interim earnings would halve, but later in the day majority shareholder Walmart offered investors a bone and appointed veteran executive Mitchell Slape to the helm to turn the business around.
Massmart, which owns Builders Warehouse, Makro, Game, Jumbo Cash and Carry, in a trading update said earnings for the half-year to June would dive by 50 percent.
The share dipped to a low of R63.80 during intra-day trade, before closing the day 13.14 percent down at R67.75.
Massmart warned that headline earnings and headline earnings a share would fall 50 percent in the six months to June, compared to the R204 million earnings in June last year.
“Current economic data and sentiment cause us to believe, however, that most risks associated with the estimates are likely to the downside,” Massmart said.
Massmart, which operates in South Africa and 11 other African countries, said that earnings before interest, tax, depreciation and amortisation might be 20 percent lower than the prior period and operating profit might be 60 percent lower in June, as the cost of restructuring and foreign exchange movements had hurt the group.
“African currency weakness in the current period is causing foreign exchange translation losses from a gain of R21 million in June 2018,” the company said.
Massmart restructured its Massdiscounters and Masscash stores as well as relocated head offices from Durban to Johannesburg, with hopes to save R52m a year.
Massmart said in a separate statement yesterday that Slape would replace Guy Hayward, who had served as chief executive since 2014 and had been with the company for 20 years.
In 2011 Walmart, the world’s biggest retailer, acquired 51 percent in Massmart for $2.5 billion (R36bn), paving the way to tap into the African market.
However, Walmart has lost around 80 percent of its investment in Massmart, which has lost market share to its competitors.
Damon Buss, an equity analyst at Electus Fund Manager, said one of Massmart’s problems was the weak top line, given the group’s thin margins.
“Consumers are not willing to accept price increases which are inhibiting retailers (like Massmart) fully passing on the cost inflation they’re experiencing in South Africa,” said Buss.
“Costs of doing business are escalating well ahead of the organic revenue growth that can be achieved in this constrained consumer environment. For example, running a generator costs a business four to five times more than electricity from the grid,” said Buss.
“The costs of the necessary IT upgrades and restructuring costs have unfortunately coincided with this weak macro environment and seem to be the key drivers of this profit warning from Massmart,” said Buss.
“The guidance implies depreciation has ballooned by 24 percent from the 2018 financial year results and Massmart believes that there is downside risk to this earnings guidance,” said Buss.
Despite lower earnings forecast for June, the company recorded a R33.5bn sales growth in the first 20 weeks of 2019.
It said total sales growth from South African stores was 5.4 percent.