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Massmart Holdings Limited - Results Of The Annual General Meeting And Statement
By The Chief Executive Officer
MASSMART HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration Number 1940/014066/06)
Share Code: MSM ISIN: ZAE000029534
("Massmart" or "the Company")
RESULTS OF THE ANNUAL GENERAL MEETING AND STATEMENT BY THE CHIEF EXECUTIVE
OFFICER
Approval of resolutions
Shareholders are advised that at the Massmart Annual General Meeting held on
Tuesday 7 December 2004, the requisite majority of shareholders passed all the
ordinary resolutions and the one special resolution, as set out in the notice of
meeting dated 26 October 2004.
Retiring director
In terms of the Company"s Articles of Association and the policy relating to
rotation of directors, Mr DG Barrett was not proposed for re-election by the
shareholders, and consequently retired at the Annual General Meeting on 7
December 2004.
Chief Executive Officer"s statement
The text of the statement made by the Chief Executive Officer, Mark Lamberti, at
the Annual General Meeting follows:
"Introduction
This year, the design theme of our results announcements and our Annual Report
has been "Simply Unique". The play on words attempted to make the point that
complexity increases risk and expense, while differentiation is required to
sustain competitiveness and profitability. More literally, the theme identifies
Massmart as a unique investment among companies listed on the JSE.
We say this because today Massmart is the only group whose revenue is generated
equally by two distinctly different distribution activities. The first, the
retailing of mainly durable goods for cash, to middle and upper income consumers
whose spending and confidence has been strengthened by low interest rates, low
inflation and a strong Rand. The second, the wholesaling of mainly food that is
ultimately consumed by people who, if employed, earn less than R1 500 per month
and for whom the largely favourable macro economic indicators have little
relevance.
It is therefore difficult for investors to predict the impact of short-term
environmental factors on Massmart"s performance or benchmark such performance
against fashion, furniture or food retailers.
The Current Financial Year
For the first time, on the release of the full year results to June 2004, we
advised shareholders of "Vision 2007", outlining the objectives and targeted
results arising from our three year rolling strategic planning process. This
plan called for the opening of 50 stores, each with average sales exceeding
R100m, by June 2007, resulting in targeted sales and earnings per share of R36b
and 600c respectively by that date. Although we will constantly refine this
plan in the light of environmental and competitive developments, we are in line
to achieve it and are pleased to report that during the current financial year
we plan to open 7 Game, 6 Builders Warehouse and 4 Tile Warehouse stores as well
as 1 CBW and 1 Jumbo cash and carry outlets.
To date 10 of these stores have been opened and tomorrow"s opening of Game
Maputo, takes us into our tenth country in Africa. In addition, Makro Strubens
Valley has been reopened and the relocation of Game Centurion and Makro Pretoria
West has enhanced the quality of the Groups store portfolio. We reiterate that
while sales will be enhanced by this store development activity, short term
profits will be depressed, particularly by the expensing of pre-opening costs
for those stores that open close to reporting periods.
The stark difference in the behaviour of the cash retail durable market and the
wholesale food market has been increasingly evident during the first half of the
current financial year. For Massmart this difference has been exacerbated by
the decline in inflation.
Driven by a strengthening Rand, South Africa has now experienced a consistent
decline of retail inflation from 10.8% in November 2002, to 2.3% in August of
this year. This has presented retailers of exchange rate-influenced goods with
an opportunity to offer lower prices across a broad range of merchandise.
Middle to upper-income consumers have responded by trading up, investing in more
or better products to enhance their lifestyles. Lower income food consumers
have simply enjoyed a respite in the historic trend of rising prices. In the
first case, lower prices and therefore lower profit margins have been offset by
higher volumes, in the second, this is not the case. Lower income consumers
don"t eat more or better when prices fall.
During the current financial year, inflation on a broad range of Massmart"s
products has continued to decline and for the first time in the Group"s 16 year
history the weighted average inflation across all merchandise categories is
minus 3%. Put differently, this means that on average all of Massmart"s goods
are being sold at a lower price than last year although as mentioned below, the
impact of this differs between divisions.
Against this background the following are noteworthy developments for the
current financial year to date:
For the 23 weeks to Sunday 5th December 2004, total sales grew 13.5%, sales
before acquisitions grew 11.0% and comparable store sales grew 8.9%. Christmas
sales thus far have been below our expectations.
Despite average deflation of 4.2%, Massdiscounters, our retail discount
division, has traded well through Game South Africa where customer count is up,
and through Dion where slightly more upscale merchandise has produced a higher
rate of sales growth than Game in Gauteng. Although foreign stores are
producing pleasing real growth in local currencies, the stronger exchange rate
has depressed their Rands sales, which now represent 8.5% of divisional sales.
The growth of credit sales, which constitutes 6% of the division"s business, is
slightly ahead of total sales growth. Expenses, debtors and working capital are
well managed and the increase in inventory is less than the increase in sales.
To date, new stores have been opened in Mitchells Plain, Gateway,
Pietermaritzburg and a Game Clearance Outlet has been opened in Boksburg. Game
Maputo will open tomorrow and smaller format stores will open in Louis Trichardt
and Ladysmith in the second half of the year. In total, the Division"s sales
are 9.7% ahead of last year, in line with budget, heading for a record Christmas
season.
Masswarehouse, our large warehouse store division, comprises Makro and the
Builders and Tile Warehouse chains. Despite deflation of 9.2%, Makro general
merchandise is experiencing satisfactory sales growth as is liquor with
inflation of 8.8%. Food inflation of 1.5% is exerting pressure on sales and
gross margins. Inventory and working capital is well controlled although
extraordinary and pre-opening expenses related to Strubens Valley and the
relocation of Pretoria West to Wonderboom will depress first half profits. We
are pleased with the progress and performance of Builders Warehouse. Management
has been further strengthened, new merchandise systems have been implemented, 3
new stores have been added since year end and the store format is being refined
to meet the needs of the chain"s target markets. The division"s total sales are
14.7% above last year, again heading for a record Christmas season.
Masscash, our cash and carry wholesale division serving resellers of mainly
basic food to the lower income market, comprises CBW and Jumbo. Both chains
continue to produce pleasing volume growth, but sales, gross margins and profits
have been depressed by average food deflation of 1.6% resulting from much higher
deflation in core commodities. There is widespread evidence that in their
failure to properly attribute lower sales growth to low or negative inflation,
many competitors in wholesale food distribution reduce prices in the vain hope
that incremental volumes will compensate for the consequent lower gross margins.
In low or negative inflation environments this is simply not the case - the
price sensitivity is dramatically reduced.
Today"s bargain could be beaten by tomorrow"s, and notwithstanding wholesalers"
lower prices, their customers buy only the volumes they need and rarely
sufficient additional quantities to compensate for the reduced gross margin. In
this environment Masscash carefully monitors sales, gross margins and market
share, while maintaining price aggression to retain market share albeit at lower
profitability. Given the opening of two new CBW stores in the Cape, the
relocation of Jumbo Durban and a sales growth of 18.4%, the division is unlikely
to grow profits on last year unless trading conditions improve.
Masstrade, the Group"s smallest division, comprises the Shield and Furnex buying
associations, which contributed 5.5% to Group operating profit in the year to
June 2004. Every element of the division has been under review since July when
the directorate was restructured and a R25m write off was taken related to a
failed systems implementation in 2002. While steady progress has been made in
reinstating the required controls and rectifying systems deficiencies,
substantial costs have been incurred to do so and conservative accounting
provisions have been raised. In addition, the profitability of the 9.3% sales
growth has been severely undermined by low food inflation and deflation in home
electronics. Finally, a thorough review of the division"s business model
indicates that the historic high return on equity is limiting the division"s
competitiveness. The medium term targeted ROS of 3% has thus been reduced to 2%
and further restructuring will eliminate the division"s profit potential in the
current year.
The 19 new or relocated stores referred to in the divisional reports above will
generate estimated additional annual sales in excess of R1.5b in their first
full year.
With less than three weeks remaining to Christmas, inventories throughout the
group are adequate, current and extremely competitively priced. We are
confident of our ability to serve our customers with exciting merchandise of
exceptional value.
Prospects
The excellent performance of the South African economy has created a platform
for sustained consumer confidence and discretionary expenditure. Although the
latter has been enhanced by the utilisation of credit, most South African
retailers have performed well in this environment.
It must be noted however that the recently released GDP revisions reflect
substantially lower retail and wholesale growth this year than in 2003 and there
is reason to expect consumer expenditure to slow at a rate dependent on the
reasons for its buoyancy.
If the current growth of consumer spending is being fuelled by cyclical macro
economic factors, then there are two reasons to be cautious about medium term
industry prospects. The first is some evidence that consumers may be reaching
the upper limits of their credit capacity. The second is the extraordinary
creation of new retail space during 2004 and the aggressive new store
development plans being announced by many retailers. If on the other hand there
is a structural shift in the composition of the South African consumer market,
manifest in a growing middle class, then any misgivings are misplaced.
Massmart is well poised to deal with either scenario. With the lowest gross
margins of any listed retailer, our value propositions have traditionally found
strong appeal in economic downturns and we are not reliant on finance charges as
a source of revenue. Conversely our product portfolio and store locations are
well positioned to serve the needs of an aspirant consumer.
Massmart"s Annual Report, released last month, describes in some detail our
progress with the implementation of the strategies that have shaped our progress
and created value for all stakeholders over the past sixteen years. Our "Vision
2007" will sustain this, but in the short term the opening of 19 stores, the
impact of lower inflation on the profitability of Masscash, the costs of
recovery in Masstrade and the effect of a stronger Rand on the translation of
foreign operations will depress operating income growth. In addition the growth
of headline earnings per share will be depressed by a R400m capital expenditure
programme, a higher cash tax payment and the payment of secondary tax on
companies.
Despite these factors, Massmart will increase sales and headline earnings per
share for the year to June 2005, but at a significantly lower rate than last
year."
The above information has not been reviewed or reported on by the Company"s
auditors.
Johannesburg
7 December 2004
Sponsor:
Deutsche Securities (SA) (Proprietary) Limited
Date: 07/12/2004 11:16:31 AM Supplied by www.sharenet.co.za
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