Massmart reports interim results in severely constrained consumer environment characterised by soft demand for durable goods and significant major food commodities deflation.
Key highlights
• Total like-for-like sales for the period grew 1.9% to R41.6 billion, while comparable store sales increased 0.2%
• Product inflation decreased to 0.7%
• Headline earnings before restructure costs decreased by 20.4% to R290.3million
• Strong online sales growth
• Exceptional operational management resulted in superior expense control
Massmart today reported interim results for the 26 weeks ended 1 July 2018. The Group reports this set of results against continued difficult trading conditions. Low food price inflation, increases in VAT, fuel costs, personal
tax and CPI, coupled with a declining GDP have created a severely constrained consumer environment. The impact of this environment has characterised by continued soft demand for durable goods as consumers prioritise spending on food over durables.
Massmart reported sales of R41.6bn, a 1.9% increase on the previous period. The weak sales environment resulted in a gross profit margin of 19.6%, and trading profit before interest and tax decreased 19.5% to R664.2m.
Massmart continues to pursue new group income streams. In the six month period, Massmart has seen particular success from its Value Added Services (VAS) business. Total money collected grew by R538 million. This was achieved through significant double-digit growth across the Value Added Service product portfolio including; money transfers (31%), lotto sales (29%), extended warranties (25%) and RCS Credit (18%).
Reflecting its investment in omnichannel retailing, Massmart increased online sales 69% in the period. The Group’s four e-commerce points of presence; Makro, Game, Dion-Wired and Builders Warehouse saw a 23% increase in the average online basket size and a 159% growth in online traffic to group online platforms.
Commercial and Public Service customers who place high value on the Group’s BBBEE credentials in their procurement decision making are an important Massmart customer segment. Given this and the Group’s commitment to inclusive growth, Massmart has devoted considerable effort to improving its BBBEE performance. We are pleased to have achieved Level 4 BBBEE Contributor Status with a score of 81.
Massmart’s African growth plans remain on track, and the Group added over five thousand square meters (2.3%) of ex-SA retail space in the period. Total sales from our ex-SA stores for the period grew by 5.7% and comparable stores by 0.6% (both in constant currencies). Given South African currency weakness, the total ex-SA Rand sales increased 1.0%.
Once again, exceptional operational management resulted in superior expense control. The Group delivered total expense growth of 3.9% for the period, well below inflation and an improvement on the comparable period’s expense management of 2.1%. Massmart contained its occupancy costs through improved management of municipal charges, and successful lease renewal negotiations.
While Full Time Employee numbers remained stable, the Group improved staff scheduling and replaced positions selectively. Massmart sees opportunity to simplify aspects of the Group’s operating structure and to leverage
group-wide scale. One priority is the implementation of a Group Distribution Centre services and network function with the aim of reducing the cost-to-serve by at least 1%. In the period under review, efficiencies from this focus, covering transport, logistics and supply chain achieved a t reduction in Distribution Centre costs. Furthermore, we see an opportunity to increase product velocity through the Massmart logistics network, resulting in improved Distribution Centre cost recoveries.
Commenting on the results, Massmart CEO Guy Hayward said: “Very weak consumer confidence resulted in lower demand for durable goods whilst significant deflation in most major food commodities impacted the wholesale business. We are delighted with our online sales growth of 69% which included a 23% increase in average online basket size. It is pleasing that we grew Durable Goods sales and market share in an environment in which demand for durables is soft as consumers prioritised spending on food.”
Outlook
For the 33 weeks to 19 August 2018, total sales amounted to R53.2 billion, representing a like-on like increase of 2.3% over the prior period. Comparable store sales increased by 0.4%. Product deflation is estimated at 0.5%.
The current weakness of the domestic economy and the volatile and uncertain international geopolitical situation which impacts the oil price and the Rand, amongst other factors, make nearterm forecasting difficult. Compounding this is that Massmart’s profitability is skewed towards the second-half of the financial year and particularly the fourth quarter which includes Black Friday and the festive season.
Assuming no further deterioration in the South African consumer economy for the remainder of 2018, Massmart is cautiously optimistic about the full year’s earnings.
