Profitability of African stores convinces Massmart to build new ones
MASSMART CEO Guy Hayward is not too stressed about the growth of its African operations outside South Africa even though they contributed just 9% to earnings in the first half.
That was because over the years the stores elsewhere in Africa had been more profitable for the retailer, Hayward said.
“Our Africa stores make more money as a percentage of sales than our South African stores do, and that is because the sales density is so much higher there.”
Massmart’s average sales per African store stand at R192-million — 3.5 times greater than those of its South African retail peers.
Hayward added that the economic headwinds and weak currencies the company was experiencing did not “particularly bother” him.
He said the Walmart-controlled company still made “a lot of money, but a little less than last year”.
Massmart’s market capitalisation fell from R31.2-billion in December last year to R25.7-billion on Friday.
Hayward said the group planned to add eight stores across three African countries — Zambia, Ghana and Nigeria — to its portfolio in the next two years. It has 35 stores in 13 countries in Africa, excluding South Africa.
Hayward plans to grow operations in the rest of Africa as fast as he can, saying he intended to increase space by 21% over two years, faster than its growth in South Africa.
The rest of Africa made up 9% of group earnings in the 26 weeks to June 28, Massmart said on Thursday.
The group spent R2-billion on new Game, Makro and Builders Warehouse stores in South Africa and elsewhere in Africa.
The group reported a 26% decline in half-year profit while net income fell to R281.6-million compared to R350-million in the previous comparable period.
Hayward had mixed feelings about the company’s interim performance.
That is because sales rose 9% and profit before interest climbed more than 12%, showing that Africa’s second-biggest retailer had a good handle on costs and margins, according to Hayward.
“Which are both great jobs in this competitive environment.
“The core business delivered 12%13% profit growth and then funding [of new stores] and factors beyond my control, like forex [foreign exchange] pushed me down.
“That’s why I say I am actually happy, but obviously as an investor the bottom [line] looks a bit negative,” Hayward said.
The group reported a foreign exchange loss of R106.7-million compared to a R7.9-million loss reported last year.
Massmart is not the only retailer affected by depreciating African currencies, as Shoprite can attest. The Angolan kwanza and Mozambican metical fell more than 5% against the rand in the past year.
And, according to Bloomberg Intelligence analysts Charles Allen and Shan Liu, import restrictions helped stabilise the Nigerian naira, but the 12-month forward rate shows it may depreciate 30% more against the dollar in a year.
These currency depreciations against the rand have the potential to hurt South African retailers that have been expanding elsewhere on the continent.
The investment community seemed unperturbed by Massmart’s numbers. In fact, investors bought more of the stock, pushing up its share price more than 4% by close of business on Thursday.
However, Massmart’s stock is still one of the worst-performing in the retail sector in recent times.
Massmart’s share price has fallen 16.4% in the year to date, underperforming the JSE retail sector, which has gained 12.8% so far this year.
Woolworths leads the sector with a jump of 26%, while Spar has gained 17.8% and Pick n Pay has added 17.5%. Shoprite, Africa’s largest grocery retailer, has fallen more than 2%.
Sasha Naryshkine of Vestact Asset Management said although Massmart had been a serial bad performer in the recent past, its business model still held true.