Massmart Turnaround On Track; Builders Impacted By Lockdowns

Massmart today reported a 5.5% increase (to R1 172.7m) in trading profit before interest and tax that was enabled by continued margin improvement and expense control momentum for the 52-week period ending 27 December.

Key highlights

• 5.5% increase in trading profit before interest and tax to R1 172.7 million

• 147 bps increase in gross margin

• 0.3% decline in total expenses

• 32.4% increase in free cash flow

The Group delivered enhanced gross margins (up 147 bps) and excellent expense control (total expenses down 0.3%). The combination of the improvement in gross margin and disciplined expense management assisted Massmart to increase free cash flow by 32.4%.

Online sales were a key highlight during the period, growing at 58.6% and delivering R1.1 billion in Gross Merchandise Value (GMV) across all Massmart trading banners. This performance was characterised by 72.9% growth in unique customers, and 69.5% increase in click and collect order fulfilment. Online growth at Builders was 111%, followed by Game at 77% and Makro at 40%. Overall online participation was 1.8% of sales.

Commenting on the period, CEO Mitch Slape said: “Our turnaround plan is working and we have achieved solid forward momentum. The strongest evidence of this can be seen by comparing performance in the second half of 2020 to the second half of 2019. Specifically, trading profit before interest and tax up 82%, margin up 4%, net expenses down 2% and free cash flow up 6%.” 

Turnaround Update

In January 2020 Massmart announced a turnaround plan to stabilise performance. Since that announcement the group has successfully delivered more than 30 turnaround projects that have delivered R600 million in total expense savings, contributed to margin uplift and significantly improved overall effectiveness.

These projects have included: exiting Dion-Wired; disposing underperforming Masscash stores; exiting fresh food and launching clothing in Game; outsourcing SAP applications development and support to Walmart India Development Centre; outsourcing financial transaction processing to Genpact; and centralising previously autonomous Real Estate, Human Resources, Information Technology, Payroll and Goods-not for re-sale functions into group Centers of Excellence.

“We have mastered the ability to execute at pace and have overcome what is arguably the biggest risk in any turnaround initiative, the ability to deliver against our commitments. There is still much work to be done, but I am satisfied that we are on the right track. We are currently executing against further initiatives and are already set to deliver 60% of our targeted savings for the current financial year,” added Slape.

Strategic Positioning

Beyond the immediacy of turnaround, Massmart has prioritised investment in high returning trading assets, mobile first online solutions and merchandise categories in which it is a market leader in its target customer segments, namely General Merchandise, DIY, wholesale food and liquor. In line with this decision the group will reduce exposure to non-core assets. Accordingly, Massmart has appointed Barclays to sell the group’s interests in Cambridge Food, Rhino and Massfresh. Massmart will also conduct a detailed review of store performance and associated support costs in market geographies outside the South  African Development Community (SADC).

As part of the expansion of the group’s online presence, Massmart will extend its online Business-to-Business market leadership and unify trading banner scale and assortment into a mobile first online solution. Toward this end the group announced a partnership with Vodacom to accelerate the commerce flywheel of their VodaPay Super App. This Super App, in which Massmart trading brands will be the retail cornerstone, will provide zero rated data access to a starting base of 44 million customers and 24 million smart devices.

Commenting on the strategic re-positioning Slape said: “Our approach has been to stabilise, focus and invest in the future growth of Massmart. We are stabilising the business through our turnaround plan, while the portfolio decisions that we have announced will significantly improve our focus and release additional intellectual, physical and financial resources for investment in our growth.”

Builders Division

Builders total sales of R13.9 billion represents a decrease of 2.1% since December 2019, while comparable store sales declined by 2.9%, with product inflation estimated at 6.0%.

Trading restrictions resulted in the temporary closure of all South African Builders stores under lockdown level 5 in April 2020. Lost sales from the Covid-19 pandemic impact is estimated to be R1.0 billion. Sales from South African stores declined by 3.0% and by 3.6% on a comparable store sales basis. Sales from the rest of Africa stores increased by 8.0% with a 10.8% increase in constant currencies and by 4.4% and 12.9% respectively on a comparable store sales basis. Efforts made in online fulfilment practices have been beneficial with online sales increasing by 111.0% compared to the prior period.

Yard sales were down significantly compared to the prior year due to the suspension of the construction industry during the lockdown period with the industry battling to recover for the balance of the year. This decrease was offset by an increase in retail sales as consumers continued to prioritise home improvement and DIY projects. This, combined with optimising product and promotional mix improved gross margin by 220bps compared to December 2019.

Expenses were well managed and efforts made in cost saving initiatives continue to reap benefits. Furthermore rental relief contributed to an overall decline in occupancy cost. Expenses increased by only 0.2% during the period, with a 1.1% decrease on a comparable basis.

Two Builders Warehouse stores, one store in South Africa and the business unit’s first store in Kenya, were opened during the period. This along with one Builders Express store being opened as well as one Builders Superstore in South Africa being closed during the period, resulted in a net 2.9% increase in trading space to 440,716m2 (2019: 428,369m2).

Outlook

In the context of a re-set cost base, higher rebased margins, confidence in ongoing turnaround execution and the renewed strategic focus in areas of market leadership, Massmart is well positioned to take advantage of future improvement in macroeconomic conditions.

Source : Massmart

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