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MASSMART HOLDINGS LIMITED - ANNOUNCEMENT

Release Date: 04/12/2002 13:41
Code(s): MSM
Wrap Text

MASSMART HOLDINGS LIMITED - ANNOUNCEMENT Massmart Holdings Limited (Incorporated in the Republic of South Africa) (Registration number 1940/014066/06) Share code: MSM ISIN: ZAE000029534 ("Massmart" or "the company") EXECUTIVE CHAIRMANS STATEMENT TO THE MASSMART HOLDINGS LIMITED ANNUAL GENERAL MEETING - 4TH DECEMBER 2002 Introduction We welcome shareholders to this, the 3rd Annual General meeting of Massmart Holdings Limited. Notice of this meeting was circulated in our annual report for the year to June 2002, a report that we hope signals our unreserved endorsement of, and commitment to, the principles and practice of good corporate governance. We believe that any additional costs and efforts expended in the pursuit of good governance will be more than compensated for within companies, by heightened awareness and vigilance and externally by enhanced relationships and credibility with all stakeholders. Environment in Massmart`s current financial year Although inflation has exaggerated growth rates, the South African consumer economy has continued to perform well in real terms. Consumer`s relatively high confidence is reflected in a steady growth of real retail sales as reported by the Central Statistical Services, the Retail Liaison Committee and in the recent results of public companies. The strength of the economy is reflected more broadly in the 3% growth of the third quarter, seasonally adjusted gross domestic product. There are early indications that the growth of inflation may be declining in response to the strengthening of the Rand against the currencies of major trading partners and the cumulative effect of four interest rate increases during the year. Retailers have been challenged by the broad based, unprecedented, rapid rise in inflation over the past nine months and the associated difficulties in measuring real sales and profits, forecasting accurately and controlling inventory and costs. These challenges will continue and may even increase as inflation declines. Performance Within this environment, Massmart`s trading and growth strategies have been resilient. Since the start of the current financial year each of the four divisions has made progress towards its strategic and operating objectives. Massdiscounters, our retail discount division comprising Game and Dion, has performed well ahead of sales and profit expectations, extending its Southern African footprint with the relocation of the highly successful Gabarone Game outlet to enlarged premises in October and the best ever opening of Game store in Mauritius last month. - Masswarehouse is our large warehouse wholesale and retail division, which comprises Makro and, if all suspensive conditions are met, will include our latest acquisition Builders and Tile Warehouse. Makro has performed in line with expectations with a strong performance in food, where a commitment to combating inflation resulted in excellent wholesale value and increased patronage by our reseller customer base. A new 11500 square meter Makro store was opened at Strubens Valley on the West Rand in October. This, the first new Makro to be opened in 6 years, exceeded our expectations both in respect of it`s own performance and in respect of the limited deflection of sales from other Massmart stores in the catchment area. Notwithstanding its good performance, the pre opening costs of this outlet will result in a negative contribution from this store for the six months to December 2002 and possibly for the year to June 2003. Despite this, the Makro chain is expected to perpetuate its solid record of real earnings growth - Masscash, our cash and carry wholesale division, comprising CBW and Jumbo has traded aggressively and performed well. CBW opened new stores in Nelspruit in October and Vereeniging in November. Jumbo successfully concluded the refurbishment of its Crown Mines outlet and the relocation of the Bloemfontein store to larger, modern premises. To date profits in the Masscash division are ahead of expectations and well ahead of last year. - Masstrade, the division that houses our Shield and Furnex buying associations, continues to make progress with integration while performing in line with sales and profit expectations. Massmart`s results for the 22 weeks to Sunday 1st December 2002 are gratifying. Sales growth before acquisitions is 32% with total sales growth including acquisitions over 35%. Comparable store sales growth for the same period is 29.7%. Profitability is ahead of budget and well ahead of the comparable period last year. Inflation With over 280 000 line items, within 1 940 article groups, in 15 major merchandise categories, in seven chains, within four divisions in eight countries, it is impossible to accurately calculate the impact of inflation on Massmart`s performance. Using weighted baskets of major items, we have determined that for Massmart`s financial year to date, liquor inflation is approximately 15%, general merchandise inflation is approximately 14% while food, almost all of which is sold for resale, is approximately 16%. Shareholders are reminded firstly that in respect of food, Massmart is predominantly a wholesaler and comparisons with retail food inflation should be qualified accordingly. Secondly, Massmart does not sell bread, fresh fruit or vegetables and very little meat, each of which are important contributors to the 19.8% food inflation as reported by Central Statistical Services in October. While inflation has exacerbated the complexity of forecasting and merchandise planning, our preoccupation has been with controlling expenses to ensure that when inflation declines to the 4% - 7% range (where we expect it to remain for some time), we will not experience a profit squeeze arising from the aberrant expense to sales ratios. Acquisitions Effective from 1st January 2002, the Furnex acquisition is contributing to the current first half of Massmart`s financial year for the first time. The major initiatives surrounding the integration of Furnex and Shield will be completed by the end of 2002 with full integration targeted by June 2003. Good progress has been made with the resolution of the suspensive conditions related to the Builders Warehouse acquisition announced on the 9th October 2002. The due diligence review is at an advanced stage and the submission to the Competitions Commission will be made this week. Prospects We retain our positive view on the fiscal and monetary management of the South African economy, recently acknowledged in the upward review of the country`s credit rating by Standard & Poors, and we welcome the statements by the Minister of Finance indicating an increased emphasis on growth. We expect some consolidation of retail growth in the first half of 2003 as the cumulative interest rate increases of 2002 dampen real consumer spending and nominal growth declines in sympathy with declining inflation. There is also reason for concern about drought and its possible impact on food prices and the financial health of rural communities. Thereafter, in the absence of any unforeseen exogenous events, we anticipate falling inflation, declining interest rates and a steady, protracted growth of consumer spending in 2003 and 2004. The continuing rationalisation of retail space across many sectors of South African retail will contribute to a more stable, profitable industry. Insofar as Massmart is concerned we see little to impede a good Christmas trading period but remain cautious about the second half of our financial year. Firstly, as mentioned above, we anticipate tighter economic conditions in the first half of 2003 and secondly we are being challenged to exceed Massmart`s strong performance in the previous comparable period, which resulted from the inclusion of the Jumbo and Browns and Weirs acquisitions for the first time, an additional two months sales from Makro Woodmead, a 53rd week, and inflationary pressure in selected product categories. Second half growth off this high base is therefore likely to be relatively muted but we remain confident that Massmart will produce a real growth of earnings at the forefront of the sector. Date: 04/12/2002 01:41:28 PM Supplied by www.sharenet.co.za Produced by the JSE SENS Department

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