Massmart sees return to profit
• Share price has biggest increase on record to close almost 21% up, bringing 2021 gains to 29%
Massmart CEO Mitchell Slape says the retailer can return to profitability by the end of the year after it cut operating costs, improved gross profit margin and boosted online sales. Massmart, which owns Game, Builders Warehouse and Makro, posted a R1.8bn loss, its second successive annual loss.
Massmart CEO Mitchell Slape says the money-losing retailer can return to profitability by the end of the year after it cut operating costs, improved gross profit margin and boosted online sales.
Massmart, which owns Game, Builders Warehouse and Makro, posted a R1.8bn loss, its second successive annual loss.
Yet Massmart’s share price had its biggest gain on record to close almost 21% up at R54.10, bringing its 2021 gains to about 29%. This is still a far cry from the R148 per share the world’s largest retailer Walmart paid when it bought 51% of the company in June 2011.
Massmart posted a 5.5% rise in earnings before interest and tax (ebit) to R1.7bn, but this was exceeded by debt finance costs just topping R1.7bn.
Despite the positive market sentiment and Slape’s belief that the group will soon see a profit, retail analyst Chris Gilmour was sceptical about Massmart returning to profitability, given the weak economic climate and the group’s high level of debt.
Market commentator Wayne McCurrie said the share price spiked as the market was expecting the operating loss but was surprised and pleased with the news of the sale of the food retail businesses.
The retailer announced it is selling its FruitStop vegetable stores and the Rhino and Cambridge food business as it focuses on its core wholesale and general merchandise business.
Massmart has failed to catch up with competitors such as Shoprite and Pick n Pay in fresh food retail.
Its Cambridge and Rhino grocery division lost R363.5m in its 2020 financial year, eclipsed only by its Game business, which lost R532.5m.
Slape, however, expressed optimism about the Massmart business turning a corner, saying it had improved free cash flow more than a third, reduced complexity by merging four divisions into two, reduced operating expenses in like-forlike stores by 1.9% and increased its e-commerce sales 60%.
“If we do all the things we are doing right now and we keep doing them right, we could see a profit at the end of the year.”
Massmart has combined its Game and Builders businesses into a single customer-facing unit, and combined its Masscash and Makro business into a wholesale division.
The group, while selling smaller food stores, is holding on to its Jumbo Cash & Carry wholesale stores, under the Masscash brand, which posted its first profit in five years.
The Builders business recorded its highest-yet profit of just more than R1bn, even as sales fell 2.1% due to the construction industry contraction and closure of stores in April.
Slape also announced a strategic review of a handful of stores in Ghana, Nigeria, Uganda and Kenya. This is a sharp reversal from Walmart’s initial decision to buy a controlling interest in Massmart to expand into the rest of Africa.
But Slape said that like all shareholders, Walmart said it expected the business to perform and the leadership team to take “thoughtful, rational decisions on where to play and where to win”.
He was adamant it was not pulling out of Africa completely.
Massmart recorded currency losses of almost R382.1m from its stores in Africa, more than double those of the year before.
Many companies pay leases or suppliers in dollars but earn in local currencies that have fluctuated wildly.
Slape told Business Day he is keeping a “close eye on Game”, but is encouraged by its improvement in the business.
Game faces a tough challenge as general merchandise such as television sets sell poorly in weak economies and as it faces competition from Naspersowned online retailer Takealot.
Slape said: “There are positive signs in the business, no question. The gross margin has improved. [Our] expenses management is stronger. We have a better assortment strategy and better customer’s service.”
The company has R5.5bn in short- and medium-term debt far exceeding ebit. McCurrie said despite the debt in the business, Walmart supports Massmart with a R4.4bn rolling loan and is unlikely to pull any support.
SLAPE, HOWEVER, EXPRESSED OPTIMISM ABOUT THE MASSMART BUSINESS TURNING A CORNER
MANY COMPANIES PAY LEASES OR SUPPLIERS IN DOLLARS BUT EARN IN LOCAL CURRENCIES