South African retailer Massmart has booked an increase in annual profits on the back of improved sales.
The company, in which Wal-Mart Stores owns a majority stake, yesterday (22 August) filed an 8.9% increase in underlying headline earnings per share. Net profit was up 39.9% at ZAR1.17bn.
Operating profit, excluding costs related to Wal-Mart's acquisition of shares in the business, increased 3.7% to ZAR2.14bn.
Total sales were up 15.6% at ZAR61.21bn. Comparable-store sales increased 9.6%.
"The results reflect the group's continued investment for growth across all divisions, but specifically for food retail. This has driven sales and market share growth, while suppressing margin growth in the short term," Massmart CEO Grant Pattison said.
The retailer is changing its financial calendar and its next full reporting period will be the 26 weeks to December.
Sales and gross margins are "expected to perform well", although "cost pressures" as a result of its investment remain, Massmart said. It expects "no net margin growth" for the 26 weeks to December or for the subsequent year to December 2013.
"Where value is extracted from integration, Massmart will invest much of it in price," the company added.
Pattison said: "The capital investments, our broad and growing relationship with Walmart, and our renewed focus on operating the business and delivering the strategy, positions us well for both growth in sales and trading margin in the medium to long term."
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Massmart Financial Results for the 52 weeks ending 24 June 2012.
Massmart results reflect record R1.7 billion investment in long-term growth
· Sales up by 15.6%, headline earnings up 38%
· 62.8% increase in cash generated from operations to R2.7 billion
· 25 new stores opened, 15 acquired
· Level 4 BBBEE status maintained
Massmart's first year as a Walmart subsidiary has delivered strong sales growth. Good trading momentum was maintained amid intensified competition, while the group invested significantly in stores and infrastructure.
Massmart increased sales by 15.6%, operating profit by 21% and headline earnings by 38%. Excluding costs related to the Walmart transaction, operating profit increased by 3.7% and headline earnings by 8.9%. Comparable sales increased by 9.6% and product inflation remained low at only 1.8%.
Cash flow generation increased 62.8% to R2.7 billion, underpinned by a solid working capital performance. A record R1.7 billion in capital was invested in stores and infrastructure. Trading space increased by 7.3% to a total of 1,350,300m² and the group now has 348 stores (with 25 stores opened, 15 acquired and 5 closed).
The intensified investment in new space, converting space for food retail and new distribution centre infrastructure caused occupancy costs and depreciation to increase ahead of sales growth. This together with above-inflation increases in local taxes and services contributed to a 19.8% increase in costs.
"The results reflect the Group's continued investment for growth across all divisions, but specifically for Food Retail. This has driven sales and market share growth, while suppressing margin growth in the short term," said Massmart CEO Grant Pattison.
Pattison added that he was pleased with the continued improvement in government relations and particularly the support for the Massmart-Walmart inspired direct-to-farm programme.
Operating Environment
According to Pattison, Massmart's high comparative sales growth suggests consumers are generally in good shape. "Middle-income consumers, particularly those that rely on unsecured credit to fund their purchases, came under pressure, and in Massdiscounters we saw a decline in credit spending on a comparable account basis. The large growth in new consumer credit accounts also points towards a trend of increasing use of unsecured credit."
Pattison also highlighted increased competition in most product categories as the battle for market share intensified, indicative of a healthy competitive environment. "Most major retailers are being highly innovative in their search for growth, whilst independent retailers remain nimble, exploiting gaps in the market," he said.
Labour relations remain sound and the group has successfully settled most of its collective wage agreements for the 2013 financial year earlier than in the previous year, with two-year agreements reached in some instances.
Strategic and Operational Review
Pattison said he was pleased with the progress made on the group's four strategic priorities, two of them related to the Walmart transaction and integration. Legally, the transaction has been completed save for the final ruling from the Competition Appeal Court on the Supplier Development Fund.
"We began implementing the Supplier Development Fund in terms of our commitments but, pending the outcome of the Competition Appeal Court ruling, have put new commitments on hold," said Pattison, adding that of the 503 employees that had previously been retrenched, 222 have been re-employed within the group.
The main integration project, which saw the alignment of governance and the bedding down of basic processes to continually extract value from the transaction, are in place. The formal integration process will wind down over the next 12 months.
Good progress had also been made maintaining trading momentum, another of Massmart's strategic priorities. "We completed the Massdiscounters Regional Distribution Centre (RDC) network, opened the first food RDC, improved our competence in Fresh and continued with Food Retail. Our Private Label and Financial Services penetration also increased during the period," said Pattison.
The group maintained its Level 4 BBBEE status and its focus on environmental sustainability saw it driving supplier advocacy and reducing its environmental footprint through continued focus on waste management and energy efficiency.
The focus on building constructive relationships with government departments was maintained through partnerships with the Departments of Basic Education, Agriculture, Forestry and Fisheries, South African Police Services, the South African Bureau of Standards, Treasury and SANDF.
Prospects
For the eight weeks to 19 August 2012, total sales increased by 17.7% and comparable sales increased by 9.8%, continuing the trends experienced towards the close of the financial year.
With the change to year-end, the next full reporting period will be the 26 weeks to December.
Sales and gross margins are expected to perform well, although cost pressures as a result of investments remain. No net margin growth is expected for either the 26 weeks to December 2012 or for the subsequent 52 weeks to December 2013.
Where value is extracted from integration, Massmart will invest much of it in price.
Commenting on the group's prospects, Pattison said: "The capital investments, our broad and growing relationship with Walmart, and our renewed focus on operating the business and delivering the strategy, positions us well for both growth in sales and trading margin in the medium to long term."
Original source: Massmart
