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We take a look at the latest trading update released by retail and wholesale giant in South Africa, Massmart (MSM) and based on the market reaction to the trading update the markets dont like the trading update at all.
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Background and overview of Massmart (MSM)
Consumers in South Africa will be hard pressed to say that never bought anything from a Massmart owned store. Some of their brands include the following:
Massmart describes themselves as follows:
Massmart is a managed portfolio of four divisions, each focused on high-volume, low-margin, low-cost distribution of mainly branded consumer goods for cash, in 13 countries in sub-Saharan Africa, comprising 403 stores. The Group is the second largest distributor of consumer goods in Africa, the leading retailer of general merchandise, liquor and home improvement equipment and supplies, and the leading wholesaler of basic foods.
- Game
- DionWired
- Makro
- Fruitspot
- Builders Warehouse
- Rhino Cash and Carry
- Cambridge
- Shield
- Trident
- Saverite
- Jumbo
Massmart describes themselves as follows:
Massmart is a managed portfolio of four divisions, each focused on high-volume, low-margin, low-cost distribution of mainly branded consumer goods for cash, in 13 countries in sub-Saharan Africa, comprising 403 stores. The Group is the second largest distributor of consumer goods in Africa, the leading retailer of general merchandise, liquor and home improvement equipment and supplies, and the leading wholesaler of basic foods.
Trading update released 30 July 2019
Sales and business update and trading statement for the 26 week period ended 30 June 2019
Sales update for the 26 week period ended 30 June 2019 For the 26-week period, Massmart’s sales of R43.8bn represent total growth of 5.5% and comparable sales growth of 3.6%, with year-to-date product inflation of 2.7%. Total sales growth from our South African (SA) stores was 4.9%, while the same figure from our ex- SA stores was 11.8% in Rands. Sales growth slowed noticeably in the six-week period since our previous update issued at the May 2019 AGM, with total growth of 3.3% and comparable growth of only 1.9%. During this six-week period, comparable sales growth slowed in Massdiscounters and Masswarehouse but increased slightly in Massbuild and Masscash. Reflecting the difficult consumer environment, margins were lower than anticipated across all divisions in May and June which resulted in a disappointing Group financial performance for the six months to June 2019 as described in the Trading Statement below. Business update Detailed information will be provided as usual in the Massmart interim financial results and presentation to investors on 29 August 2019, but some key points per division are noted below. It should be noted that all performance references below are before the impact of IFRS 16. For the six months to June 2019, Massdiscounters will report a trading loss of between R395m and R425m, compared to the June 2018 trading loss of R95m. Profits in Game South Africa are below the prior period, but much lower in Game Africa and DionWired. Compounding this are higher costs from the SAP IT project and supply chain and logistics.
There have been several changes to the Massdiscounters executive team in the last few months:
• CEO Albert Voogd resigned with effect from July 2019 and has been replaced, in the interim, by Andrew Stein. Andrew has been with Massmart for 10 years and has worked in both Cambridge and Makro;
• Riaan Turton was appointed as finance director and Kathrine Madley was appointed marketing director; and
• Neville Hatfield has been appointed merchandise director with effect from July 2019. Neville has been the merchandise director at Builders Warehouse since 2006 and prior to that had been the merchandise director at Game.
Masswarehouse will report trading profit of between R320m and R370m which is 24% to 34% below the prior period. Much of the lower profitability is caused by the soft sales, margin pressure from the lower sales participation of general merchandise and expense growth caused partly by the new Makro store opened in Durban North in March 2019. Massbuild will report trading profit of between R238m and R266m which is 5% to 15% below the prior period, as a result of lower sales and expense growth. Masscash will report a trading loss of between R180m and R210m, below the June 2018 trading loss of R4m. Despite improved sales in the wholesale business, this weak profit performance was caused by margin pressure in that business, weak sales growth in the retail business and expense growth.
Sales update for the 26 week period ended 30 June 2019 For the 26-week period, Massmart’s sales of R43.8bn represent total growth of 5.5% and comparable sales growth of 3.6%, with year-to-date product inflation of 2.7%. Total sales growth from our South African (SA) stores was 4.9%, while the same figure from our ex- SA stores was 11.8% in Rands. Sales growth slowed noticeably in the six-week period since our previous update issued at the May 2019 AGM, with total growth of 3.3% and comparable growth of only 1.9%. During this six-week period, comparable sales growth slowed in Massdiscounters and Masswarehouse but increased slightly in Massbuild and Masscash. Reflecting the difficult consumer environment, margins were lower than anticipated across all divisions in May and June which resulted in a disappointing Group financial performance for the six months to June 2019 as described in the Trading Statement below. Business update Detailed information will be provided as usual in the Massmart interim financial results and presentation to investors on 29 August 2019, but some key points per division are noted below. It should be noted that all performance references below are before the impact of IFRS 16. For the six months to June 2019, Massdiscounters will report a trading loss of between R395m and R425m, compared to the June 2018 trading loss of R95m. Profits in Game South Africa are below the prior period, but much lower in Game Africa and DionWired. Compounding this are higher costs from the SAP IT project and supply chain and logistics.
There have been several changes to the Massdiscounters executive team in the last few months:
• CEO Albert Voogd resigned with effect from July 2019 and has been replaced, in the interim, by Andrew Stein. Andrew has been with Massmart for 10 years and has worked in both Cambridge and Makro;
• Riaan Turton was appointed as finance director and Kathrine Madley was appointed marketing director; and
• Neville Hatfield has been appointed merchandise director with effect from July 2019. Neville has been the merchandise director at Builders Warehouse since 2006 and prior to that had been the merchandise director at Game.
Masswarehouse will report trading profit of between R320m and R370m which is 24% to 34% below the prior period. Much of the lower profitability is caused by the soft sales, margin pressure from the lower sales participation of general merchandise and expense growth caused partly by the new Makro store opened in Durban North in March 2019. Massbuild will report trading profit of between R238m and R266m which is 5% to 15% below the prior period, as a result of lower sales and expense growth. Masscash will report a trading loss of between R180m and R210m, below the June 2018 trading loss of R4m. Despite improved sales in the wholesale business, this weak profit performance was caused by margin pressure in that business, weak sales growth in the retail business and expense growth.
Masscash CEO Kevin Vyvyan-Day has announced his resignation with effect from the end of August 2019 and will be replaced, in the interim, by Deepa Sita. Deepa has been the finance and commercial director at Makro since 2016 and she has extensive experience in the South African FMCG market.
Trading Statement for the 26 week period ended 30 June 2019
Given the above performances, it is estimated with reasonable certainty that for the six months to June 2019 the Group will report an operating loss, before non-trading items, foreign exchange movements and net interest, of between Rnil and R30m. This disappointing performance was caused by softer than expected sales, margin weakness and expense growth of approximately 12% (comparable 9%). New stores representing 3.1% additional trading space have been opened since June 2018 and this impacted on employment, depreciation and occupancy costs in addition to cost-inflation. African currency weakness has resulted in foreign exchange losses anticipated to be R81m, in comparison to a foreign exchange gain of R23m in the prior period. The losses are caused primarily by recent currency weakness in Zambia and Nigeria. Net interest costs will be approximately 18% higher than the prior period figure of R300m. The tax charge has been adversely impacted by an inability to raise deferred tax assets in certain ex-South African tax entities and impairing deferred tax assets in some South African and non-South African tax entities.
Consequently, excluding the impact of IFRS 16, shareholders are advised that Massmart anticipate, with reasonable certainty, the following for the six months to June 2019:
Trading Statement for the 26 week period ended 30 June 2019
Given the above performances, it is estimated with reasonable certainty that for the six months to June 2019 the Group will report an operating loss, before non-trading items, foreign exchange movements and net interest, of between Rnil and R30m. This disappointing performance was caused by softer than expected sales, margin weakness and expense growth of approximately 12% (comparable 9%). New stores representing 3.1% additional trading space have been opened since June 2018 and this impacted on employment, depreciation and occupancy costs in addition to cost-inflation. African currency weakness has resulted in foreign exchange losses anticipated to be R81m, in comparison to a foreign exchange gain of R23m in the prior period. The losses are caused primarily by recent currency weakness in Zambia and Nigeria. Net interest costs will be approximately 18% higher than the prior period figure of R300m. The tax charge has been adversely impacted by an inability to raise deferred tax assets in certain ex-South African tax entities and impairing deferred tax assets in some South African and non-South African tax entities.
Consequently, excluding the impact of IFRS 16, shareholders are advised that Massmart anticipate, with reasonable certainty, the following for the six months to June 2019:
- Headline (loss)/ earnings (Rm) (530.0) to (550.4) which reflects a change of (359.7%) to (369.7%) compared to previous period
- HEPS (cents) (240.5) to (249.8) which reflects a change of (353.7%) to (363.5%) compared to the previous period
- Net (loss)/ earnings (Rm) (582.4) to (602.0) which reflects a change of (397.6%) to (407.6%) compared to the previous period
- Basic EPS (cents) (264.3) to (273.2) which reflects a change of (390.7%) to (400.5%) compared to the previous period
Share price history
The image below, taken of Sharenet shows the share price performance for Massmart (MSM) for today (30 July 2019). And it is pretty clear when Massmart released the trading update and the market's reaction to it.
The summary below shows the share price performance of Massmart (MSM) over various time periods:
The numbers show that its been a tough old time for MSM shareholders and it doesn't look like there is a light at the end of the tunnel anytime soon. Good luck to MSM investors. It's probably going to get a whole lot worse before it gets better.
- Today (30 July 2019); - 15.45%
- 1 week: -7.32%
- Year to date (YTD): -43.1%
- 1 year: -47.97%
- 3 years: -59.38%
- 5 years: -58.43%
The numbers show that its been a tough old time for MSM shareholders and it doesn't look like there is a light at the end of the tunnel anytime soon. Good luck to MSM investors. It's probably going to get a whole lot worse before it gets better.