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Massmart
Dedicated to Value Retailing
Interim Unaudited Results for Six Months to 31 December 2000
Massmart is a management group, invested in a portfolio of focused but
collaborative retail and wholesale distribution formulae, each reliant on
operational excellence as the foundation of price leadership, in the
distribution of mainly branded consumer goods.
Turnover: R6171m Up 9%
Trading Profit: R194m Up 20%
Headline Earning: R145m Up 77%
Headline EPS: 73,8c Up 10%
Cash Flow from Operations: R421m Up 32%
Overview
Despite testing external trading conditions and difficulties with the
conclusion of a major internal consolidation initiative, we are pleased to
report strongly improved profits and returns, well ahead of expectations and
the comparable period last year.
These results strongly reflect Massmart's strategic imperative to secure
quality sales at a higher margin and cash flow.
The most noteworthy features of the period were:
* 4 new stores
* Continued market share gains in all major product categories
* Improved pre- and post-interest operating profit to sales
* Strong cash generation
* Improved trading margins in all divisions
* Excellent results from Makro and CCW
* Unsatisfactory merchandise and marketing management in Massdiscounters
* Sales of R212m through the eShield B2B internet portal
* The dilution of earning per share arising from the issue of 40m new shares
for cash
Strategy and Portfolio
The strategies and structures of Massmart have been designed to deliver
exceptional value to customers through high volume, low price, focused formats,
which collaborate to enhance procurement, reduce costs and penetrate markets.
Makro
A chain of 14 large warehouse club outlets situated in South Africa and
Zimbabwe, trading in food, liquor and general merchandise at wholesale prices.
Massdiscounters
A chain of 67 discount stores, offering a wide range of general merchandise
under the Dion and Game banners, to value seeking consumers in South Africa,
Namibia, Botswana and Zambia.
Shield
A voluntary buying association assisting 268 independent wholesalers and 270
independent retailers to procure food more efficiently in South Africa,
Namibia, Botswana, Lesotho and Swaziland.
CCW
A peri-urban and rural chain of 19 cash and carry warehouses, located in South
Africa, Lesotho and Namibia, distributing basic food, groceries and liquor to
lower income consumers.
Environment
As the South African consumer market evolves, much is being made of specific
factors shaping the profile of discretionary spending.
In our view, commentators have failed to adequately highlight the more general
negative impact of unemployment and AIDS on lower income consumption, or the
deleterious effect of low confidence levels on higher income earners. The
former has resulted in a desperation ameliorated only by the willingness of the
employed to support extended families. The latter has dulled the shopping
intensity of the upper income LSM 7 and 8 groups, which account for
approximately 19% of all households, 70% of household income and 83% of
discretionary spending excluding services, food and clothing.
There is a growing disparity between the consumption patterns of South African
consumers and the retail infrastructure designed to serve them. South Africa
has too much retail space per capita and astute retailers will initiate and
profit from the rationalisation, consolidation and realignment of retail assets
over the coming years.
Estimated real retail sales, as reported by the Central Statistical Services,
grew 3,1% in the six months to December 2000 compared to 1,9% in the same
period in 1999.
Financial Results
Income Statement
Notes Six Months Six Months % Change Year to
to December to December June
2000 1999 2000
(Restated &
(Unaudited) Audited) (Audited)
Rm Rm Rm
Turnover 6171,4 5650,8 9 10634,6
Makro 2252,4 2072,6 9 3922,6
Massdiscounters 2253,2 2078,0 8 3844,7
Shield 948,7 936,4 1 1724,0
CCW 717,1 563, 827 1143,3
Trading Profit Before
Interest 193,5 161,4 20 211,3
As a % of Turnover 3,14 2,86 1,99
Makro 63,3 44,6 42 49,9
Massdiscounters 89,8 82,2 9 100,1
Shield 21,1 20,1 5 33,6
CCW 19,3 14,5 33 27,7
Exceptional Items 1 (19,7) (0,4) (9,8)
Net Financing
Income / (Cost) 7,0 (42,9) (57,2)
Profit Before Tax 180,8 118,1 53 144,3
Taxation 2 48,0 31,9 37,4
Profit After Tax 132,8 86,2 54 106,9
Associate Company 0,8 1,2 1,0
Minorities 3,4 3,1 4,0
Attributable Income 130,2 84,3 54 103,9
Headline Earnings 144,7 81,9 77 110,4
Proforma Headline
Earnings 3 144,7 103,5 40 132,0
Headline EPS (cents) 4 73,8 67,2 10 79,5
Proforma Headline
EPS (cents) 3 3,8 66,3 11 84,5
Diluted Headline
EPS (cents) 73,8 66,3 11 79,3
Attributable
EPS (cents) 66,4 69,2 (4) 74,8
Dividend (cents) 15,0* - 9,4*
* Declared and paid
after period
Cash Flow Statement
Six Months Six Months Year to
to December to December June
2000 1999 2000
(Restated &
(Unaudited) Audited) (Audited)
Rm Rm Rm
Cash Inflow from Trading 229,7 185,8 263,9
Working Capital Movement 190,8 132,1 (191,3)
Cash Outflow from Other
Operating Activities (13,4) (55,1) (84,4)
Dividends Paid (18,5) - -
Investment In and
Replacement of Fixed Assets (125,6) (84,6) (158,0)
Financing Activities 458,7 (105,1) (102,3)
Opening Cash and Cash
Equivalents (88,0) 184,1 184,1
Closing Cash and
Cash Equivalents 633,7 257,2 (88,0)
Statement of Changes in Equity
Opening Balance 596,5 91,4 91,4
Exchange Differences 1,9 0,2 2,1
Intangibles Written-off - (423,0) (430,9)
Deferred Taxation on
Trademarks Written-off (6,5) 80,1 71,0
Net Retained Income 137,1 421,0 431,0
Shares Issued / Converted 475,4 416,8 431,9
Closing Balance 1204,4 586,5 596,5
Additional Information
Trading Profit Before
Items Below: 219,6 180,9 253,1
- Dividends Received 13,3 11,5 23,8
- Depreciation (39,4) (31,0) (65,6)
Trading Profit Before
Interest 193,5 161,4 211,3
Capital expenditure:
- Authorised and Committed 5,1 0,3 0,6
- Authorised not Committed 33,5 14,3 109,6
Contingent Liabilities 57,8 52,9 82,7
Ordinary Shares (000's):
- In Issue 197077 156127 157077
- Weighted-Average 195984 121838 138769
- Diluted Weighted-Average 196211 156232 139116
Restatement of December 1999 Results
Shareholders are reminded of the changes in accounting policy that affected the
financial results to June 2000. For clarity, the previously published December
1999 results prepared in terms of the old accounting policies, are reconciled
to the restated figures below:
Previous Profit after Tax 96,8
Exclude Share of Associate
Company Earnings (1,2)
Impact of Changes in Accounting Policy:
- Leave Pay (3,4)
- Post-retirement Medical Aid (1,8)
- Deferred Tax (4,2)
Restated Profit After Tax 86,2
Balance Sheet
December December June
2000 1999 2000
(Restated & (Restated &
(Unaudited) Audited) Audited)
Rm Rm Rm
Assets
Property, Plant
and Equipment 387,1 329,7 340,4
Investments and Loans 171,3 136,0 151,9
Deferred Tax 257,4 288,0 281,1
Inventories 1520,4 1623,8 1355,7
Accounts Receivable 1004,3 902,7 827,9
Net Cash and Bank /
(Short Term Borrowings) 633,7 257,2 (88,0)
Total 3974,2 3537,4 2869,0
Equity and Liabilities
Shareholders' Equity 1204,4 586,5 596,5
Minority Interests 18,1 13,8 14,6
Long Term Liabilities
and Provisions 69,4 101,6 84,3
Deferred Tax 4,6 - 8,9
Accounts Payable
and Provisions 2677,7 2835,5 2164,7
Total 3974,2 3537,4 2869,0
Net Asset Value (cents) 611,1 375,7 379,8
Notes
1. Exceptional items to December 2000 comprise mainly certain IT asset
write-offs in Massdiscounters.
2. The group's average tax rate has been reduced by certain non-taxable income.
3. Proforma headline earnings show the earnings for the periods to December
1999 and June 2000 assuming the convertible debentures had been converted from
1 July 1999, i.e. with after-tax debenture interest added back. Proforma
headline EPS shows the impact of the higher number of issued shares assuming
that the convertible debentures had been converted.
4. On 4 July 2000, 40m ordinary shares were issued for net cash proceeds of
R475m. This has diluted Massmart's Headline and attributable earnings per share
for the six months to December 2000 by approximately 7 cents per share.
Excluding the impact of the capital raising, headline EPS grew by 22%.
5. These financial statements have been prepared in accordance with South
African Statements of Generally Accepted Account Practice.
6. Due to Christmas trading, Massmart's earnings are weighted towards the six
months to December.
Operating Results
Massmart's sales growth, 0,7% of which was attributable to the 4 new stores
opened during the period exceeded national retail sales growth. The implied
growth of market share was gratifying in the light of an internal inflation
rate of approximately 4%. Food grew 11%, liquor 4% and general merchandise
including apparel 9%.
Massmart Holdings is a management company dedicated to enhancing the individual
and collective performance of its subsidiaries. To reflect this and to more
accurately report subsidiary performance, all corporate costs have been
allocated to the subsidiaries on a basis consistent with the effort devoted by
the Holdings Company. Comparatives have been restated.
Six Months Six Months % Change Year to
to December to December June
2000 1999 2000
Rm Rm Rm
Trading Profit
Before Tax 192,8 166,8 16 235,4
As a % of Turnover 3,12 2,95 2,21
Makro 75,0 54,0 39 83,4
Massdiscounters 71,3 71,3 - 76,6
Shield 25,3 24,1 5 42,4
CCW 21,2 17,4 22 33,0
Divisional Highlights
Makro - Comparable store sales growth of 9% arising from innovative merchandise
and marketing management and excellent control of margins, assets and costs
resulted in a strong growth of profits and improved pre- and post-interest
returns on sales.
Massdiscounters - The consolidation of Game and Dion under one management team
over the past two years has resulted in a more balanced portfolio of general
merchandise discount stores, a lower cost base and higher profitability than
would otherwise have been achieved.
Numerous changes of senior management have been required to achieve this, most
notably the appointments of Grant Pattison as Managing Director, Steve
Glendenning as Organisation Development Director, responsible for human
resources and information technology, and Neville Hatfield as General Manager
Merchandise.
The merger was particularly disruptive to the merchandise division, which
experienced changes to leadership, structure and systems, all of which
contributed to less than optimal merchandising and marketing in the period
under review. Comparable store sales growth of 1% fell short of expectations,
an increase in slow moving stock necessitated increased provisions and slower
stock turns resulted in higher interest costs. The division has now been
stabilised with processes reinstated to ensure the controls and trading
aggression which are hallmarks of Game and Dion.
Shield - The division experienced a difficult period as the lower end of the
market served by Shield's customers came under pressure. This contributed to
the muted sales growth, which was also attributable to the decision to maintain
the company's excellent control of debtors by focussing on higher quality sales
Sales of R212m were generated through eShield, the company's internet enabled
trading platform, which is now being used by 236 members. Profits were
depressed by the R2m cost investment in eShield, which will render returns when
the majority of members have adopted the service and legacy systems are
abandoned.
CCW - Comparable store sales growth of 14% and the opening of a new outlet in
Rustenburg produced a strong growth in sales. Margins, expenses, shrinkage and
working capital were well controlled resulting in a strong growth in profits
and improved pre- and post-interest return on sales.
South African Revenue Services (SARS)
The speculation surrounding the SARS investigation of the electronics industry
has prompted Massmart to review all systems and procedures relating to VAT and
Customs and Excise duties. All internal controls have been found robust and
further external controls of suppliers have been instituted to ensure total
compliance within the company's sphere of control.
There is currently no investigation of Massmart by SARS and Directors are not
aware of any non-compliance internally or in the supplier base. Nevertheless,
Massmart is committed to co-operating with SARS to ensure compliance and
therefore equitable trading in the distribution trade.
Prospects
Massmart's particular approach to mass distribution is well suited to the
changing market place which is Southern Africa today.
The following factors will result in a second half contribution relatively
higher than in previous years:
* Structural expense reductions, implemented in Massdiscounters early in the
first half, will have a significant impact on the traditionally lower second
half earnings
* Makro has now established a sales to expense ratio which ensures higher
profitability in the second half
* The merchandise and marketing issues in Massdiscounters are being resolved
Against a background of continued economic recovery, we remain confident that
Massmart will produce a growth in earnings per share ahead of the retail
sector, in line with our expectations on listings.
Johannesburg Stock Exchange - STRATE
In order to facilitate an orderly transition ahead of Massmart's migration to
STRATE, the Directors intend to implement STAR, a service offered by Mercantile
Registrars, to assist shareholders to validate and dematerialise their Massmart
shares prior to migration to STRATE. A circular setting out the relevant
details and any action required will be posted to shareholders during the next
few weeks.
Dividend
Notice is hereby given that an interim dividend of 15,0 cents per share in
respect of the period ended 31 December 2000 has been declared payable to the
holders of ordinary shares registered in the books of the company at the close
of business on 16 March 2001. Dividend cheques will be posted on or about 23
March 2001.
On behalf of the Board
Mark J Lamberti - Executive Chairman
Steve Leggatt - Chief Financial Officer
19 February 2001
Directorate: M.J Lamberti (Executive Chairman), D.G Barrett* (Executive), W.
Kirsh, S. Legatt* (Executive), J.D Newton, M.J Rubin, F. Schukken**, C.S
Seabrooke. * British, ** Netherlands.
Massmart Holdings Ltd - Company Registration Number - 1940/014066/06,
Registered Office - Massmart House, 16 Peltier Drive, Sunninghill Ext 6, 2157
www.Massmart.co.za
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