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Massmart - Reviewed consolidated results for the 52 weeks ended June 2004
Massmart Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 1940/014066/06)
Share code:MSM
ISIN: ZAE000029534
("Massmart")
Reviewed consolidated results for the 52 weeks ended June 2004
Dedicated to Value
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 nine 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 17% to R23 788 million
* Trading profit increase 24% to R929 million
* Headline earnings increase 32% to R634 million
* Headline earnings before acquisitions increase 22% to R579 million
* Headline EPS increase 32% to 318,8 cents
* Cash flow from operations increase 62% to R1 271 million
* Distribution to shareholders increase 64% to 159 cents
Overview
Aided by a buoyant middle to upper income consumer market, but depressed by
average deflation of 1,2% across all product categories and the impact of a
stronger Rand on foreign sales, revenue grew by over R3,4 billion to establish a
five-year compound annual sales growth of 22,1%. The Group has now registered
its 31st consecutive half-year of real sales growth, with an 8% per annum
compound growth above inflation over 16 years.
Productivity improvements, expense control and excellent working capital
management, resulted in improved margins and profits, establishing a five year
compounded annual headline earnings per share growth of 56,5%. Massmart"s
headline earnings per share has now grown consistently for the past 13 half-year
reporting periods, increasing by 316% since the Group"s listing on the
Johannesburg Securities Exchange on 4 July 2000.
The highlights of the year were:
* Sales approaching R24 billion
* Real comparable store and comparable member growth of
10,7%
* Stronger sales and profit growth in the second half
* Average sales per store up 2% to R126,5 million
* Average sales per trading square metre up 5% to R32 000
* Average sales per employee up 11% to R1,4 million
* Record pre- and post-interest operating profit margins
of 3,90% and 3,87% respectively
* Full year cash flow from operations exceeding R1 billion
for the first time
* An improvement in rolling twelve-month return on equity
from 31,2% to 36,1%
* 43% of the year"s growth was organic, increasing the
proportion of organic growth since 1988 to 29%
* Extending the store network to 157 with the acquisition
and opening of 17 new stores with estimated annualised
sales of R1,5 billion
* Foreign operations contributing 6,2% of sales.
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.
The management of Massmart remains focused on a "Vision for Growth," a rolling
three-year financial forecast resulting from the implementation of clearly
defined strategies over that period. The "Vision for Growth 2007" contains
specific plans and objectives for: continued real sales growth from existing
outlets; expansion into new categories and formats; new outlets; the relocation,
enlargement and refurbishment of selected outlets and selected acquisitions that
conform to Massmart"s strategic and financial criteria. In support of these
medium term objectives, 17 new stores were opened or acquired during the past
year, enhancing the quality of the portfolio and improving the Group"s presence
in under-represented markets. Of the 50 stores (each with estimated average
sales exceeding R100 million) targeted to open before June 2007, at least 19
will be opened in the current year, increasing Massmart"s trading space to 721
000 square metres.
We are ever mindful that poor implementation results in business failure more
often than poor strategy. There are 17 565 Massmart employees who ensure the
sound implementation of our strategies every day, in their dealings with the
stakeholders we serve and whose respect we hope to earn. Without the growing
competence, extraordinary energy, and humbling loyalty of our employees in nine
countries, Massmart"s performance and growth would be unsustainable. We are
deeply indebted to each of them for their contribution to these results.
Environment
As our President reminds us, South Africa is a country of two economies.
The first, affected by inflation, interest, and exchange rates, comprises those
in the LSM 5 to 10+ groups who purchase the semi-durable and durable goods sold
by Massmart"s various formats. Over the past year these consumers reached their
highest confidence levels in 16 years and any retailer who failed to prosper
through serving them, did not deserve the approbation of fellow shopkeepers.
This segment accounted for 57% of Massmart"s sales and 64% of profits.
The second, the 4,8 million households or 23,2 million people who constitute the
LSM 1 - 4 groups and who struggle to survive, are, for the most part, the
ultimate consumers of the fast moving consumer goods sold by Massmart"s
wholesale outlets. These consumers were cautious in the face of actual or
potential unemployment, and with low or negative inflation, the intermediary
traders who serve them realised that holding high levels of inventory is not the
profitable pursuit it once was. Volumes and margins were depressed by the low
inflation rate and competition was intense. This segment accounted for 43% of
Massmart"s sales and 36% of profits.
Crime was a significant factor over the past year with armed robberies resulting
in the loss of one life and R15,9 million of merchandise and cash. 2 313 people
were caught and charged for shoplifting. Less obvious, but more detrimental to
the sustainability of legitimate businesses and the jobs they create, is the
trade in stolen and counterfeit goods, and the widespread contravention of
employment, tax and import legislation, by traders who lack the ability or
morality to compete legitimately.
Performance
Massmart"s real sales growth accelerated throughout the year. Sales growth
before acquisitions was 12%. Acquisitions, comprising Trident (Botswana) and
three cash and carry outlets, contributed sales of R415 million. Comparable
store and member growth of 10,7% was depressed by a decrease in inflation and
the impact of the stronger Rand on foreign sales. General merchandise grew
23,9%, liquor 29,3% and food 9,4%. Massmart"s
-1,2% average inflation on selling prices was the weighted average of -5,3%
inflation in general merchandise, 1,2% in food and 9,7% in liquor.
Trading profit before interest and acquisitions grew 12% to R837 million.
Headline earnings per share before acquisitions grew 22% to 291 cents per share.
Industry statistics and the reported sales of competitors indicate that Massmart
gained market share, particularly in wholesale food.
Massdiscounters - comprises retail general merchandise discounters Game (56
stores), which trades in South Africa, Namibia, Botswana, Zambia, Uganda, and
Mauritius, and Dion (11 stores), which trades in the Gauteng province of South
Africa.
Aggressive merchandising and marketing enabled Game South Africa and Dion to
sustain a high rate of comparable store growth, despite deflation for the period
of 4,2%. Although Game"s foreign sales in Rands fell below the previous year,
Massdiscounter"s comparable store sales grew 9,5%. Game enjoyed the benefit of a
buoyant durables market and Dion produced profits well in excess of those
produced by both Dion and Game at the time of the Game acquisition in 1998.
Notwithstanding a foreign exchange loss of R23,8 million, exceptional control of
expenses and working capital resulted in Massdiscounters achieving its medium
term annual profit before tax return on sales target of 5%. In the light of this
performance and with reference to our 7,4% international benchmark, this target
has been increased to 6%.
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, all in the major metropolitan areas of South Africa. Comparable
store sales grew 12,1%.
In Makro, good general merchandise and liquor growth, the successful recruitment
of new cardholders, and innovative marketing were underpinned by sound control
of margin, expenses and working capital to produce profit growth almost three
times that of sales. The highly successful Strubens Valley outlet, totally
destroyed by a fire started by subcontractors working on an extension to the
store in May, will reopen on an enlarged footprint towards the end of October
2004. The only consolation of this event was that the injury-free evacuation of
customers and staff was directly attributable to the R20 million that has been
invested in fire equipment, prevention and training throughout the Makro chain
over the past three years.
Significant progress was made with the growth and integration of the Builders
Warehouse and Tile Warehouse chains. Each chain opened two new stores (the most
recent with a new design), the head office was relocated to the Makro campus,
the calibre of management was improved as was the quality of procurement and
promotional activity, and a start was made to the upgrade of systems. These
initiatives enhanced profitability and established a firmer foundation for
future growth, exemplified by the post year-end acquisition of the Mica Edenvale
and Rivonia stores.
The division exceeded its 4% medium term profit before tax margin target, which
has now been increased to 5%, the result of a weighted application of
international benchmarks.
Masscash - comprises 57 CBW and six Jumbo wholesale cash and carry outlets
trading in South Africa, Lesotho, Namibia, and Botswana. Comparable store sales
grew 5,1%.
Inflation of 1,2% exerted pressure on CBW"s sales and margin. This was most
evident in the chains dominant category of maize meal, where price reductions
resulted in a sales decline of R200 million. This together with a R6,6 million
currency loss on foreign operations, and six new outlets that have yet to
achieve their targeted profitability, undermined the profitability that should
have resulted from a higher second half sales growth. After interest profits
were depressed by a capital outflow of R61 million comprising payments for
acquisitions, a first time dividend payment to Massmart and a cash inflow from
sale of land and buildings. Despite these factors, profit growth exceeded that
of sales.
Jumbo produced a consistent improvement in most key measures throughout the
year, culminating in higher sales growth and higher pre- and post-interest
profits in the second half. In the first half, aggressive competition, falling
inflation, a decline in exports resulting from a stronger Rand, a 14-day strike
in October and the closure of the Isipingo store, depressed sales and profits.
In contrast, during the second half, the opening of the Nelspruit store, a
better performance from the Durban outlet (which has been relocated to larger
premises since year-end), strong real sales growth and better management of
expenses and inventory resulted in higher profits and profitability than the
first half, narrowing the shortfall on the previous full year.
Excluding a R24,2 million profit on the sale of land and buildings, Masscash
achieved record profits albeit at a slightly lower profit before tax return on
sales relative to its 4% target.
Masstrade - comprises voluntary buying organisations Shield (serving 740
independent food outlets) and Furnex (serving 856 independent furniture and
appliance outlets). Comparable member growth was 25,2%.
Masstrade experienced the contrary market dynamics described above, as upper
income consumers patronised independent furniture, appliance and home
electronics retailers through Furnex and lower income consumers bought from
wholesalers and retailers who are Shield members.
A satisfactory trading performance was undermined by a non-cash pre-tax write-
off of R25 million attributable to 2003, related to balance sheet items
incorrectly accounted for during the early stages of the implementation of the
Great Plains system in Shield and the subsequent merger of Shield and Furnex.
Pursuant to this, the directorate of the division has been substantially
restructured and action has been taken to reinstate accounting and control
standards acceptable to the Group.
Adjusting for the write-off, Masstrade achieved a profit before tax return on
sales of 2,49% relative to the division"s target of 3%.
June 2004 June 2003
(Reviewed) (Audited)
Rm Rm % Change
Trading profit before 949,2 711,9 33,3
tax*
As a % of sales 4,0 3,5
Massdiscounters 340,2 227,0 49,9
Masswarehouse (note 1) 284,6 173,1 64,4
Masscash (note 1) 267,3 234,0 14,2
Masstrade 57,1 77,8 (26,6)
* Trading profit before tax is before corporate interest paid of R27,9 million
(2003: R14,6 million), goodwill amortisation and exceptional items.
Board changes
Following the sale of its 30,9% shareholding in Massmart on 21 January 2004, SHV
appointees Messrs Mavuso Msimang, Folkert Shukken and his alternate Derk Dojier
resigned from the board. During May and June respectively, Messrs William Kirsh
and Steve Leggatt resigned from the board to concentrate their energies on the
companies they serve as chief executives. We thank each of these gentlemen for
their valued contribution over many years.
Ms Phumzile Langeni, an executive director of Barnard Jacobs Mellett, and Mr Jim
Hodkinson, previously a director of Kingfisher PLC and managing director of its
major subsidiary B&Q for 12 years, were appointed independent non-executive
directors of the board with effect from 25 August 2004.
Game trademark
Settlement has been reached with the South African Revenue Services (SARS)
concerning the disputed valuation of the Game trademark. The terms of the
settlement have no income statement impact on the current or prior financial
years. Masstores" assessed loss is now utilised and it will commence paying cash
tax during the 2005 financial year.
Prospects
For four years South African retail has been the beneficiary of favourable
economic conditions, the evolution of a new consumer market and a secular upward
valuation of domestic property. We believe these developments are more
structural than cyclical and are likely to endure for some time. Conversely we
believe that South Africa"s relative immunity to international developments in
recent times cannot be relied on, and we are cautious about the potential
negative effect on our economy of sustained high oil prices and exposure to the
United States Dollar.
Strategy is however not about predicting the future but rather about configuring
resources and capabilities to ensure relatively superior performance through all
reasonable scenarios. We remain confident that Massmart"s leadership depth,
complementary portfolio, and unique approach to high volume, low cost
distribution will ensure sustained performance at the forefront of the sector.
Our confidence in our country and our company is evident in a record R400
million capital expenditure programme planned for the current year, adding at
least 71 000 square metres, in support of a budgeted sales growth approaching R4
billion.
For the eight weeks to 22 August 2004, total sales grew 11,6%, sales before
acquisitions grew 8,7% and comparable store sales grew 7,0%.
Distribution and dividend policy
Massmart"s new dividend policy is to declare and pay an interim and final
dividend representing a two times dividend cover unless circumstances dictate
otherwise.
In terms of the authority granted by shareholders in the annual general meeting
held on 18 November 2003, notice is hereby given that the company will
distribute out of share premium, in lieu of dividends, an amount of 98,0 cents
per share. This amount will be payable to the holders of ordinary shares
recorded in the books of the company on Friday, 17 September 2004. The last date
to trade "cum" the distribution will be Friday, 10 September 2004 and Massmart
shares will trade "ex" the distribution from Monday, 13 September 2004. Payment
of the distribution will be made on Monday 20 September 2004. Share certificates
may not be dematerialised or rematerialised between Monday, 13 September 2004
and Friday, 17 September 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
Deputy Chairman and Chief Financial Officer
Chief Executive Officer
Income statement
Year ended Year ended
June 2004 June 2003
(Reviewed) (Audited)
Rm Rm % Change
Sales 23 787,7 20 369,5 16,8
Massdiscounters 6 783,5 6 229,3 8,9
Masswarehouse 7 066,5 5 704,7 23,9
Masscash 6 649,3 5 740,1 15,8
Masstrade 3 288,4 2 695,4 22,0
Trading profit before 928,5 747,7 24,2
interest
As a % of sales 3,9 3,7
Massdiscounters 356,6 297,4 19,9
Masswarehouse (note 1) 258,6 160,1 61,5
Masscash (note 1) 251,9 208,8 20,6
Masstrade 61,4 81,4 (24,6)
Goodwill amortisation (74,6) (49,5)
Exceptional items (note - 6,7
2)
Net interest paid (7,2) (50,4)
Profit before taxation 846,7 654,5 29,4
Taxation (275,5) (215,2) 28,0
Profit after taxation 571,2 439,3 30,0
Minorities (8,9) (10,0)
Net profit for the year 562,3 429,3 31,0
Reconciliation of net
profit for the year to
headline earnings
Net profit for the year 562,3 429,3
Exceptional items - 2,3
Goodwill amortisation 74,6 48,9
Net profit on realisation (2,7) (0,5)
of fixed assets (note 1)
Headline earnings 634,2 480,0 32,1
Headline EPS (cents) 318,8 242,4 31,5
Diluted headline EPS 307,5 235,6 30,5
(cents)
Attributable EPS (cents) 282,6 216,8 30,4
Diluted attributable EPS 272,6 210,7 29,4
(cents)
Dividend (cents):
- Interim 61,0 48,0 27,1
- Final (declared and 98,0 49,0 100,0
paid after the financial
year-end)
Ordinary shares (000"s):
- In issue 199 191 198 587
- Weighted-average 198 951 198 050
- Diluted weighted- 206 244 203 763
average
Balance sheet
June June
2004 2003
(Reviewed) (Audited)
Rm Rm % Change
Assets
Property, plant and 570,1 546,2
equipment
Goodwill 614,0 499,7
Investments and loans 249,7 277,8
Deferred tax 146,5 157,1
Inventories 2 356,5 2 236,7
Accounts receivable and 1 997,8 1 551,4
prepayments
Cash and bank balances 1 154,2 612,1
Total 7 088,8 5 881,0
Equity and liabilities
Shareholders" equity 1 850,2 1 666,1
Minority interests 31,7 22,4
Long-term liabilities - 250,5 247,8
interest bearing
Other long-term liabilities 34,0 32,2
and provisions
Deferred tax 64,9 25,7
Accounts payable and 4 697,9 3 779,2
accruals
Bank overdraft and short- 159,6 107,6
term borrowings
Total 7 088,8 5 881,0
Net asset value per share 928,9 839,0 10,7
(cents)
Cash flow statement
Year ended Year ended
June 2004 June 2003
(Reviewed) (Audited)
Rm Rm % Change
Cash inflow from trading 1 015,2 848,9 19,6
Working capital movement 255,3 (63,6)
Cash flow from operations 1 270,5 785,3 61,8
Taxation paid (124,2) (77,5)
Net interest paid (5,5) (50,4)
Investment income 19,0 11,0
Dividends paid (218,8) (166,6) 31,3
Net replacement of fixed (74,8) (59,8)
assets
Investment in fixed (263,3) (216,6)
assets
Businesses acquired (110,1) (173,6)
Other investing (7,3) (59,0)
activities
Net financing activities 28,9 30,8
Foreign exchange losses (4,2) (10,5)
taken to statement of
changes in equity
Opening cash and cash 563,4 550,3
equivalents
Closing cash and cash 1 073,6 563,4 90,6
equivalents
Statement of changes in equity
Year ended Year ended
June 2004 June 2003
(Reviewed) (Audited)
Rm Rm % Change
Opening balance 1 666,1 1 414,0 17,8
Prior year adjustment - (6,1)
Exchange differences (7,9) (10,5)
Dividend paid and share (218,8) (166,6)
premium distribution
Net profit for the year 562,3 429,3
Shares issued 12,8 14,9
Treasury shares (29,4) -
Reduction of deferred tax (94,8) (5,5)
asset
Share trust loss and other (40,1) (3,4)
Closing balance 1 850,2 1 666,1 11,1
Additional information
Depreciation (133,5) (107,8)
Capital expenditure:
- Authorised and committed 41,3 103,1
- Authorised not committed 168,3 47,5
Contingent liabilities 2,2 13,3
Operating lease 4 355,8 4 223,6
commitments (2004 - 2013)
US dollar exchange rates - 6,34 7,55
period end
US dollar exchange rates - 6,84 8,96
average
Notes
1. Included in the trading profit of Masscash is a R24,2 million profit on sale
of land and buildings, and in Masswarehouse, a net R19,2 million loss on
building due to destruction by fire. These amounts have been included with other
profits on sale of fixed assets that are excluded from headline earnings.
2. Exceptional items in the prior year comprise a bad debt recovery relating to
the 2002 VAT fraud settlement (R9,0 million gain) and an impairment on the
investment in Affinity Logic (R2,3 million loss).
3. Deducted from trading profit is R19,9 million (2003: R27,3 million) in net
realised and unrealised foreign exchange translation losses and a translation
loss on open forward exchange contracts at June 2004 of R18,8 million (2003:
R6,0 million).
4. These financial statements have been prepared in accordance with AC127
(Interim Financial Reporting), using accounting policies that 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.
5. Due to Christmas trading, Massmart"s earnings are weighted towards the six
months to December.
In terms of the authority granted by shareholders, a subsidiary of Massmart
acquired 2 413 711 shares during the period under review, representing 1,2% of
the shares now in issue. The shares were acquired at an average price of R26,76
for a consideration of R64,6 million. Shares on hand at June 2004 have been
treated as treasury shares.
These results have been reviewed by auditors Deloitte & Touche 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*, IN Matthews, P Maw,
DNM Mokhobo, MJ Rubin *Executive **United Kingdom
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 & Touche
For more information: www.massmart.co.za
26 August 2004
Johannesburg
Sponsor to Massmart:
Deutsche Securities (SA) (Proprietary) Limited
Date: 26/08/2004 07:00:21 AM Supplied by www.sharenet.co.za
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