Betting on food and liquor
For almost a decade Massmart has been dishing up one disappointment after another to investors. There are signs that their patience will at last be rewarded, but these remain, at best, tentative.
Massmart delivered some hope to investors in its half-year to June, lifting headline EPS (HEPS) a solid 14.2%, and an even better 19% if noncash foreign exchange adjustments are excluded. It was its strongest showing since becoming a 51%owned subsidiary of Walmart in a US$2.54bn deal that was closed in June 2011.
“We could be seeing the benefits of [Guy] Hayward’s appointment as CEO [in April 2014] starting to come through,” says independent retail analyst Syd Vianello. “I have always said he was put into the position by Walmart to fix the business.”
However, what is still needed is definitive evidence that Massmart is regaining the traction it began losing well before the advent of Walmart. HEPS had peaked three years earlier, in 2008, at 663c, and seven years on were still 22% lower at 516.3c, just 1.3% up on 2014.
Massmart’s dismal profit showing was far from being due to a lack of expansion. Between 2008 and 2015 store numbers grew by about two-thirds, from 242 to 403, and sales more than doubled, from R39.8bn to R84.7bn.
First to take its toll on profits was a R5bn capex programme, launched in 2008 primarily to remedy a serious gap in Massmart’s supply chain: the absence of centralised distribution. The eight central distribution centres 15,500 14,500 that were built added a big dose of costs.
The integration into the Walmart stable was also disruptive and costly, setting Massmart back altogether R799m in 2011 and 2012.
No sooner had Massmart put the Walmart integration behind it than it was beset by another costly problem: a rapid deterioration of profits in its Massdiscounters division.
Dominating the division is one of Massmart’s flagship brands, Game, which began hitting multiple problems in 2012. Not least was its failure to rejuvenate its ageing stores.
Also taking Game by costly surprise was a rapid change in the consumer electronics environment. Big-selling product lines such as cameras and laptops gave way to smart phones and tablets.
The overall impact on Massdiscounters’ profits was devastating. Profit before interest and tax (PBIT) slumped a huge R563m, from R744m in 2011 to R181m in 2014.
Trading margin also collapsed, from 5.6% in 2011 to 1% in 2014. Massdiscounters accounted for 34% of Massmart’s PBIT in 2011.
The first positive sign of a recovery came in 2015, when Massdiscounters lifted PBIT to R235m. It followed this through in the latest six months, when PBIT came in 110.8% up year on year at R62.4m on a 7.6% rise in sales to R6.95bn.
“Game is key to the Massmart investment case,” says Warren Jervis, manager of the Old Mutual Small & Mid Cap fund.
“Massdiscounters should be capable of producing annual EBIT [earnings before interest and tax] of R600m-R700m.”
Another big test will come in