Game needs extra time
Losses at problem child Game continue to balloon, yet CEO Mitch Slape remains adamant he’s on the right path
Game might be into its third year of losses, but Massmart CEO Mitch Slape is resolute about holding onto it.
What he describes as a “fundamentally different” business could turn a profit in 12 months, he says, thanks to structural interventions and a big improvement in “look and feel”.
Buying into this would be a big leap of faith for the market, given that for the year ended December 26 Game’s trading loss almost doubled to R1.03bn while sales fell 8.7% to R15.3bn. For now, few believe in the vision.
Investors punished Massmart on the back of its results and the share lost about 17% in value over Monday and Tuesday, taking its year-todate loss to 33%.
Group losses widened from R1.8bn to R2.2bn year on year, thanks to alcohol restrictions and the anarchy and looting in July last year.
Slape had predicted the group would break even this financial year but it was particularly hard hit by the riots; stores were closed and two warehouses were looted — one was also burned down — which resulted in stock shortages. Nine stores and two distribution centres are still closed because of the damage, which came to almost R1.5bn.
In the face of questions about why the group retains the business, Slape says Game has a role to play — particularly as the group evolves into an omnichannel retailer. “If we continue forward with the positive signs that we’re seeing out of the core stores, I think there’s a case to be made for Game. I’m demanding, I’m looking for results — I don’t believe we’re at a stage where we’d want to call it. We really want to see this play out.”
A diminishing number of analysts share this view.
Evan Walker, portfolio manager at 36One Asset Management, says Game should be closed down, but lease commitments make this difficult. “There’s no place for the brand in SA — it can’t compete with Shoprite and Takealot.”
It’s not as if Massmart hasn’t been pruning its operations, however.
It sold its loss-making Cambridge and Rhino grocery stores, closed DionWired, got Game out of the food business, merged units to boost bulkbuying synergies and improved its store environments. Massmart expects these cost savings to reach R2bn by the end of this financial year.
Negotiations are under way to sell Game stores in East and West Africa, however, as well as 15 “noncore”, underperforming stores in SA. Once these are offloaded, the group will be left with 117 Game stores nationwide.
Massmart is keen to flag that this remaining core of outlets recorded sales growth of 3.8% in January and a 64% jump in trading profit on the same period last year.
SA accounts for 90% of the group’s business and in the results presentation Slape said the projects with the highest returns tend to be those the group invests in “at home” — within
Southern African Development Community countries.
About 72% of group capital spend has been allocated to new Builders and Makro outlets and e-commerce. Game is the fastest-growing brand in e-commerce and the vision is that it will play a central role as another distribution point for customers.
Slape says the group is now in “execution mode”, ready to think about growth and investment using the might of its US parent.
“We want to be the market leader and will leverage Walmart at every turn possible … We’ve reset the cost base, established a cost-conscious culture in the business and we’ve created a portfolio that’s geared for growth — a portfolio that allows us to put our capex against the highest-returning, best-performing assets that we have in the business.”
Typically, says Massmart, remodelling one of the stores in its stable results in a 5% increase in sales. It predicts that expanding the store footprint of Builders by 50% and of Makro by 25% could lead to R9.4bn in extra revenue.
Slape says surveys show consumers perceive the group’s stores as being 10% cheaper than their rivals. “And we are maintaining and strengthening our gross profit margins and building very strong market share positions.”
Still, shareholders, for the third year running, won’t receive a dividend.
Slape estimates that 15% of group sales will soon be through e-commerce. Massmart recently bought OneCart, a same-day delivery service that now handles just over 40% of its deliveries. “We see that going to over 65% in the coming years,” he says.