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MASSMART HOLDINGS LIMITED - INTERIM CONSOLIDATED RESULTS FOR THE 26 WEEKS ENDED
DECEMBER 2003
Massmart Holdings Limited
registration number: 1940/014066/05
JSE code: MSM
ISIN: ZAE000029534
Dedicated to Value
Interim consolidated results for the 26 weeks ended December 2003
Simply unique
Massmart, is a unique, managed portfolio of nine wholesale or retail chains,
each focused on high-volume, low margin, low cost distribution of mainly branded
consumer goods for cash, in eight countries in southern Africa. The Group is the
third largest distributor of consumer goods in southern Africa, the leader in
general merchandise and liquor and the fourth largest in food.
Sales increase 16% to R12 255 million
Trading profit increase 30% to R561 million
Headline earnings increase 27% to R366 million
Headline earnings before acquisitions increase 20% to R337 million
Headline EPS increase 26% to 183,5 cents
Cash flow from operations increase 92% to R1 078 million
Distribution to shareholders increase 27% to 61 cents per share
Overview
Massmart"s 30th consecutive half-year of double digit sales growth was achieved
despite a stronger Rand which undermined foreign sales and contributed to the
lowest inflation rate recorded since the company"s founding. Appropriate
management of merchandise, marketing, pricing, expenses and working capital
resulted in a pleasing growth of profits, profitability and cash flow.
The highlights of the half-year were:
* record half-year sales and pre- and post-interest profits in all divisions;
* record half-year pre-interest trading margins in all divisions;
* record half-year post-interest trading margins in all divisions other than
Masstrade, which maintained that of the comparable period;
* half-year pre-interest operating profit at 4,57% and post-interest
operating profit at 4,55% of sales, both exceeding 4,5% for the first time;
* comparable store and comparable member sales growth of 8,5% with an average
selling price inflation of zero across all Massmart product categories;
* improved working capital management with cash flow from operations
exceeding R1 billion;
* an improvement in rolling twelve-month return on equity from 30,3% to
32,2%;
* the acquisition and opening of 10 new stores with estimated annualised
sales of R80 million per store; and
* the inclusion of Builders Warehouse for the full period.
Strategy and implementation
Since 1990, Massmart"s growth and profitability have been reliant on the
achievement of an appropriate balance between two major objectives. The first is
strategically aligned, organic and acquisitive growth through trading divisions
constituted on the basis of similar target markets and business models. The
second, collaboration between these divisions, which results in profitability
and returns greater than could otherwise be achieved.
Notwithstanding economic volatility and heightened competition in recent years,
the successful implementation of this strategy has resulted in a sustained
growth of sales, profits, profitability, and returns, off an increasingly
demanding base.
In August 2002, shareholders were advised of a "Vision for Growth", which
targeted sales of R30 billion and operating profit of R1 billion by June 2005.
In August 2003, these targets were increased and extended to June 2007 founded
on: continued real sales growth from existing outlets; expansion into new
categories and formats; new outlets; and selected acquisitions that conform to
Massmart"s strategic and financial criteria. Since then 12 of the 44 stores
planned have been added to the Group and all other aspects of the Vision are in
line with objectives.
Successful implementation is always a collective achievement - more so in
challenging times - and we thank the 17 527 Massmart associates whose daily
focus is providing exceptional value across a very wide range of merchandise to
a broad profile of southern African consumers. It is solely their dedication and
competence that has mitigated the risks implicit in fast growth.
Environment
During the reporting period the Rand/Dollar exchange rate remained relatively
stable although approximately 30% firmer than the same period in 2002. Year-end
prime interest rates were 5,5 percentage points or 30% lower than in 2002. All
inflation indices accelerated their downward trend of early 2003. The Producer
Price Index (PPI) fell to its lowest level ever recorded, driven by the impact
of a stronger currency on the imported component of PPI, and competitive
pressure on local manufacturers. The Consumer Price Index (CPI), the Consumer
Price Index excluding mortgage costs (CPIX) and retail inflation touched their
lowest levels in decades. This resulted in low levels of inflation in food and
liquor and deflation in most general merchandise categories with a consequent
high growth of durable and semi-durable volumes. Relative to the same period
last year, the low increase in the cost of living, an increase in real wages and
5,5% lower interest rates, enhanced disposable income and thus consumer spending
for middle to upper income consumers.
Competition was intense across all product categories. The general merchandise
sector experienced margin pressure as retailers moved to clear stock bought at
higher prices, and thus increased sales volumes without a concomitant increase
in sales values. Notwithstanding the low levels of food inflation, there was
little increase in retail food volumes, and wholesalers reduced inventories in
anticipation of little or no inflation, while competing aggressively to ensure
that market share and Rand margins were maintained. Gross margins in the
fragmented retail liquor sector came under pressure as traders sacrificed price
in the vain hope that volume would compensate.
This economic and competitive environment imposed the following demands on the
business:
* imported stock on hand lost value as the currency strengthened, requiring
significant markdowns to remain price competitive and ensure stock turns
remained high;
* improved stock management and supplier collaboration were required to
reduce stock in order to mitigate the exposure to further currency volatility;
* with US Dollar linked sales under pressure from the strengthening Rand,
foreign stores required more intense management of inventory, margins and
promotions; and
* as cost prices fell, buyers were forced to adopt a more flexible approach
to mark-ups in order to preserve margin while maintaining a competitive stance.
Performance
Massmart"s real sales growth accelerated throughout the half-year. Sales growth
before acquisitions was 11,5%. Acquisitions, comprising Builders Warehouse, Tile
Warehouse, and seven cash and carry outlets, contributed sales of R483 million.
Comparable store and member growth of 8,5%, was depressed by a 10 percentage
point decrease in inflation and the impact of the stronger Rand on foreign
sales. General merchandise grew 24%, food 8% and liquor 30%. Massmart"s zero
inflation on selling prices was the weighted average of 8% deflation in general
merchandise, 2% inflation in food and 10% inflation in liquor.
Trading profit before tax and acquisitions grew 23,7% to R517 million. Headline
earnings before acquisitions grew 20% to R337 million.
Industry statistics and the reported sales of competitors indicate that
Massmart"s R1,7 billion sales increase resulted in market share gains.
December December June
2003 2002 2003
(Reviewed) (Reviewed) (Audited)
Rm Rm % change Rm
Trading profit
before tax* 564,5 415,3 35,9 711,9
As a % of sales 4,6 3,9 3,5
Massdiscounters 213,8 180,8 18,3 227,0
Masswarehouse 170,3 94,0 81,2 173,1
Masscash (note 2) 133,8 102,1 31,0 234,0
Masstrade 46,6 38,4 21,4 77,8
* Trading profit before tax is before corporate interest paid of R7,0 million
(2002: R2,7 million received), goodwill amortisation and exceptional items.
Massdiscounters - comprises retail general merchandise discounters Game (55
stores) and Dion (11 stores). Aggressive merchandising and marketing enabled
Game South Africa to sustain a high rate of comparable store growth despite
deflation for the period of 8%. A mediocre first quarter for Dion and foreign
sales in Rands well below the previous year, depressed Massdiscounters"
comparable store sales growth to 7,4%. A new Game outlet in Kampala, Uganda,
will open in June. Despite a foreign exchange loss of R12 million, exceptional
control of expenses and working capital resulted in pleasing progress towards
the division"s medium term annual profit before tax return on sales of 5%.
Masswarehouse - comprises the 12-store Makro warehouse club trading in food,
general merchandise and liquor, eight Builders Warehouse outlets trading in DIY
and builders hardware and seven Tile Warehouse outlets trading in tiles and
sanitary ware. Comparable store sales grew 11,9%.
In Makro, good general merchandise growth, the successful recruitment of new
card-holders and innovative marketing was underpinned by sound control of
margin, expenses and working capital to produce profit growth more than double
that of sales. The success of the Strubens Valley store opened in October 2002
has prompted the decision to enlarge it later this year.
Massmart"s early influence on Builders Warehouse and Tile Warehouse was manifest
in improvements to the structure and calibre of management, the quality of
procurement and promotional activity, the upgrading of systems and in the design
and layout of the new Strubens Valley and Rustenburg stores which opened in
November and January respectively. These initiatives resulted in enhanced
profitability from sales of R364 million and established a firmer foundation for
the aggressive roll out of these chains.
An unwavering commitment to high volume, low price operating principles, the
refurbishment and relocation of selected Makro outlets and rapid expansion of
the Builders Warehouse and Tile Warehouse stores will be complemented by the
sensible pursuit of back office synergies between the three chains, to ensure
the achievement of the division"s targeted annualised profit before tax return
on sales of 4%.
Masscash - comprises 55 CBW and five Jumbo wholesale cash and carry outlets.
Comparable store sales grew 4,5%.
Despite low food inflation and subdued demand from small traders, CBW produced a
good result increasing profits before tax by 43,0% (excluding the profit
referred to in note 2) from a sales growth of 13,6%. New stores were opened in
Kimberley and Klerksdorp, the integration of the Trident and Drinks Galore
acquisitions proceeded according to plan, and two new stores are planned for the
current financial year.
Despite aggressive competition, falling inflation, a decline in exports
resulting from a stronger Rand, and a 14-day strike in October, Jumbo almost
maintained comparable store sales. This was achieved at the expense of gross
margins in selected stores, which together with the closure of Isipingo,
depressed profits before tax . Progress during the last quarter was pleasing
with sales, margins and costs responding favourably to the restructuring and
strengthening of branch and head office management. Store development will
entail one new store and one relocation in the current financial year. To
facilitate succession and advance the integration of Jumbo into Masscash,
Surendra Bhawan was appointed Deputy Chairman and Fred Cresswell Managing
Director.
Excluding a R16,5 million profit on the sale of land and buildings, Masscash
achieved a record profit before tax return on sales moving closer to its 4%
annual target.
Masstrade - comprises voluntary buying organisations Shield (serving
766 independent food traders) and Furnex (serving 853 independent furniture and
appliance traders). Comparable member growth was 14,2%.
In Shield the steady growth of comparable sales and an increase in members
during the period produced a pleasing growth in profit before interest while a
substantial growth of new members contributed to an excellent performance from
Furnex. The integration of the two businesses into Masstrade is reaching
conclusion with the implementation of a new system in Shield, improving
administration and debtors control and the appointment of Mike Marshall as
Operations Director to refine and reduce the costs of the division"s business
processes.
Although Masstrade"s profit before interest grew well ahead of sales, profit
before tax return on sales remained static relative to the division"s annual
target of 3%.
Group Initiatives
Other non-trading highlights include the adoption of a new Group Human Capital
Strategy which aims to focus and integrate the development of all Massmart
associates; the formulation of an integrated Black Economic Empowerment Strategy
to achieve the objectives of the new Act; the approval of an Ethical Code of
Conduct in line with Corporate Governance standards and the consolidation of our
interdivisional collaborative efforts under the recently created position of
Group Commercial Executive.
Game Trademark
Massmart has received written notice from SARS that it has withdrawn its written
ruling issued in 2002 concerning the valuation of the Game trademark for tax
purposes and the related write-off period. At that time, following
correspondence and discussions between Massmart and SARS, it was agreed that the
Game trademark valuation, for the purposes of s11(gA) of the Income Tax Act,
would be R475 million and that it was to be written off over ten years
commencing in 1999. The annual cash tax benefit was therefore R14,25 million.
Massmart has taken legal counsel and believes that it has strong grounds to
oppose the withdrawal. Massmart and SARS remain in discussion on this matter.
Should the SARS decision be upheld then any tax payable will not impact earnings
in the current or prior years. It will however impact interest foregone on
additional cash tax payments made in 2004 and thereafter.
Board changes
Pursuant to the sale of its 30,9% shareholding in Massmart on 21 January, SHV
appointees Messrs Mavuso Msimang, Folkert Schukken and his alternate Derk Doijer
resigned from the Board. We thank them all for their valued contribution, but in
particular Mr Folkert Schukken who has served on the Board for eight years.
Prospects
Massmart faced a number of environmental and internal challenges in the period
from January to June 2003. Trading conditions and the state of the Group are far
better a year later and there is every indication of a good second half.
Sales growth has continued to accelerate and margins have firmed in early 2004
with January"s profits ahead of budget. The business is appropriately stocked
and margins, costs and cash are in better control than at this time last year.
In the absence of unforeseen circumstances, it is likely that the second half
growth of EPS will compare with that of the first half.
For the 34 weeks to 22 February 2004 total sales grew 17,4%, sales before
acquisitions grew 12,2% and comparable store sales grew 9,8%.
Distribution and dividend policy
Massmart"s dividend policy is to declare and pay an interim dividend
representing a three times dividend cover but a total annual dividend of two and
a half times cover, unless circumstances dictate otherwise.
In terms of the authority granted by shareholders in the annual general meeting,
notice is hereby given that the company will distribute out of share premium, in
lieu of dividends, an amount of 61,0 cents per share. This amount will be
payable to the holders of ordinary shares recorded in the books of the company
on 19 March 2004. The last date to trade "cum" the distribution will be 12 March
2004 and Massmart shares will trade "ex" the distribution from 15 March 2004.
Payment of the distribution will be made on 23 March 2004. Share certificates
may not be dematerialised or rematerialised between 15 March 2004 and 19 March
2004, both days inclusive.
In terms of the requirements of the Companies Act, the directors confirm that
after the payment of the distribution, Massmart will be able to pay its debts as
they become due in the ordinary course of the business, and its consolidated
assets, fairly valued, will exceed its consolidated liabilities.
On behalf of the Board
Mark J Lamberti Guy Hayward
Chief Executive Officer and Chief Financial
Deputy Chairman Officer
25 February 2004
Income statement
6 months 6 months Year
ended ended ended
December December June
2003 2002 2003
(Reviewed) (Reviewed) (Audited)
Rm Rm % change Rm
Sales 12 254,7 10 555,0 16,1 20 369,5
Massdiscounters 3 590,0 3 346,1 7,3 6 229,3
Masswarehouse 3 668,7 2 855,4 28,5 5 704,7
Masscash 3 280,3 2 951,2 11,2 5 740,1
Masstrade 1 715,7 1 402,3 22,3 2 695,4
Trading profit before interest 560,5 429,9 30,4 747,7
As a % of sales 4,6 4,1 3,7
Massdiscounters 229,5 213,4 7,5 297,4
Masswarehouse 157,0 87,3 79,8 160,1
Masscash (note 2) 122,5 91,2 34,3 208,8
Masstrade 51,5 38,0 35,5 81,4
Goodwill amortisation (35,9) (22,2) 61,7 (49,5)
Exceptional items - - - 6,7
Net interest paid (3,0) (11,9) 74,8 (50,4)
Profit before tax 521,6 395,8 31,8 654,5
Taxation (171,8) (126,3) (36,0) (215,2)
Profit after tax 349,8 269,5 29,8 439,3
Minorities (4,3) (5,0) 14,0 (10,0)
Net profit for the period 345,5 264,5 30,6 429,3
Reconciliation of net profit
for the period to headline
earnings
Net profit for the period 345,5 264,5 429,3
Exceptional items - - 2,3
Goodwill amortisation 35,9 22,2 48,9
(Profit)/loss on sale of fixed (15,8) 0,5 (0,5)
assets
Headline earnings 365,6 287,2 27,3 480,0
Headline EPS (cents) 183,5 145,4 26,2 242,4
Diluted headline EPS (cents) 176,6 141,8 24,5 235,6
Attributable EPS (cents) 173,5 133,9 29,6 216,8
Diluted attributable EPS 166,9 130,6 27,8 210,7
(cents)
Distribution/dividend (cents):
- Interim 61,0* 48,0* 27,1 48,0
- Final - - 49,0*
Ordinary shares (000"s):
- In issue 199 191 196 822 198 587
- Weighted-average 199 191 197 547 198 050
- Diluted weighted-average 207 068 202 556 203 763
* Declared and paid after the accounting period
Balance sheet
December December June
2003 2002 2003
(Reviewed) (Reviewed) (Audited)
Rm Rm Rm
Assets
Property, plant and equipment 604,3 522,3 546,2
Goodwill 604,1 369,7 499,7
Investments and loans 240,2 260,8 277,8
Deferred tax 115,5 166,9 157,1
Inventories 2 753,2 2 909,7 2 236,7
Accounts receivable and prepayments 1 919,2 1 468,7 1 464,4
Cash and bank balances 1 433,7 924,2 612,1
Total 7 670,2 6 622,3 5 794,0
Equity and liabilities
Shareholders" equity 1 899,0 1 574,9 1 666,1
Minority interests 27,4 17,5 22,4
Long-term liabilities - interest bearing 246,6 273,6 247,8
Other long-term liabilities and 34,0 33,6 32,2
provisions
Deferred tax 29,5 8,3 25,7
Accounts payable and accruals 5 109,1 4 511,4 3 692,2
Bank overdraft and short-term borrowings 324,6 203,0 107,6
Total 7 670,2 6 622,3 5 794,0
Net asset value per share (cents) 953,4 800,2 839,0
Cash flow statement
6 months ended 6 months ended Year ended
December 2003 December 2002 June 2003
(Reviewed) (Reviewed) (Audited)
Rm Rm Rm
Cash inflow from trading 596,9 472,1 848,9
Working capital movement 481,0 89,6 (63,6)
Cash flow from operations 1 077,9 561,7 785,3
Taxation paid (93,4) (42,6) (77,5)
Net interest paid (3,0) (11,8) (50,4)
Investment income 10,6 0,8 11,0
Dividends paid (97,5) (71,3) (166,6)
Net replacement of fixed assets (52,2) (55,7) (59,8)
Investment in fixed assets (148,2) (146,7) (216,6)
Businesses acquired (102,4) - (173,6)
Other investing activities (15,5) (20,2) (59,0)
Net financing activities 37,7 37,3 30,8
Net share buyback - (17,3) -
Foreign exchange losses taken to (2,7) (6,1) (10,5)
statement of changes in equity
Opening cash and cash 563,4 550,3 550,3
equivalents
Closing cash and cash 1 174,7 778,4 563,4
equivalents
Statement of changes in equity
6 months ended 6 months ended Year ended
December 2003 December 2002 June 2003
(Reviewed) (Reviewed) (Audited)
Rm Rm Rm
Opening balance 1 666,1 1 414,0 1 414,0
Prior year adjustment - (5,2) (6,1)
Exchange differences (2,7) (6,1) (10,5)
Dividends paid (97,5) (71,3) (166,6)
Net profit for the period 345,5 264,5 429,3
Shares issued/converted 12,8 1,8 14,9
Reduction of deferred tax asset - (5,5) (5,5)
Net share buyback - (17,3) -
Share trust loss (25,2) - (3,4)
Closing balance 1 899,0 1 574,9 1 666,1
Additional information
6 months ended 6 months ended Year ended
December 2003 December 2002 June 2003
(Reviewed) (Reviewed) (Audited)
Rm Rm Rm
Trading profit before items 625,9 481,5 855,5
below:
- Depreciation (65,4) (51,6) (107,8)
Trading profit before interest 560,5 429,9 747,7
Capital expenditure:
- Authorised and committed 19,8 43,1 103,1
- Authorised not committed 132,8 25,3 47,5
Contingent liabilities 8,5 4,6 13,3
Operating lease commitments 3 903,8 4 224,4 4 223,6
(2004 - 2013)
US dollar exchange rates
- period end 6,86 8,76 7,55
- average 7,02 9,95 8,96
Notes
1. Deducted from trading profit is R10,0 million (2002: R19,1 million) in net
realised and unrealised foreign exchange translation losses and a translation
loss on open forward exchange contracts at December 2003 of R7,6 million (2002:
R6,6 million).
2. Included in the Masscash result is a profit on sale of land and buildings
of R16,5 million. This amount is included with other net losses on sale of fixed
assets which are excluded from headline earnings.
3. These financial statements have been prepared in accordance with AC127
(Interim Financial Reporting), using accounting policies which are in line with
South African Statements of Generally Accepted Accounting Practice and on a
basis consistent with prior periods, except for the consolidation of the
Massmart Share Trust. The Trust has been consolidated in line with the ruling of
the JSE"s GAAP Monitoring Panel. Comparatives have been restated accordingly and
there is no earnings impact.
4. Due to Christmas trading, Massmart"s earnings are weighted towards the six
months to December.
5. Share buyback - In terms of the authority granted by shareholders, Massmart
acquired a total of 1 437 629 shares during the period under review,
representing 0,7% of the shares now in issue. The shares were acquired at an
average price of R24,51 for a consideration of R35,2 million by a wholly owned
subsidiary of Massmart and were sold to the Massmart Share Trust during the
year.
6. These results have been reviewed by Auditors, Deloitte, and their
unqualified review opinion is available for inspection at the registered office.
Directorate: CS Seabrooke (Chairman), MJ Lamberti + (Chief Executive and Deputy
Chairman), DG Barrett*, MD Brand, ZL Combi, GRC Hayward+, W Kirsh, S Leggatt*,
IN Matthews, P Maw, DNM Mokhobo, MJ Rubin, *UK +Executive
Massmart Holdings Limited JSE code: MSM, ISIN: ZAE000029534, Company
registration number: 1940/014066/05
Registered office: Massmart House, 16 Peltier Drive, Sunninghill Ext 6, 2157,
Company secretary: A Cimring Auditors: Deloitte
For more information: www.massmart.co.za
Date: 26/02/2004 07:06:32 AM Supplied by www.sharenet.co.za
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