Massmart sales update

Yesterday, just as the market was closing we received a trading update from our favoured retailer Massmart. It is going to get complicated with these guys because they are changing their year end. Here is what the update said. Take a read and we can discuss the implications after.


"For the 14 weeks to 30 September 2012, total stores' sales increased by 16.6% and comparable stores' sales increased by 7.8%, continuing the trends experienced at the close of the last financial period.


With the coming change in Massmart's financial year-end, the next reporting period will be the 26-week "financial year" to December 2012. Sales and gross margins are expected to grow satisfactorily, although cost pressures will remain. Currently we expect no improvement in the Group's net trading margin for either the 26-weeks to December 2012 or for the year to December 2013.


Beyond the next 18 months, we believe the Group is well positioned for strong growth, in both sales and profits."


The last time we heard from Massmart was when they released full year numbers on the 22nd of August. Those numbers looked good but it was in comparison to a year where the big acquisition cost the company a lot of money. Without those costs headline earnings were only up 8.9% on the back of 15.6% increase in sales. However in this update margins seem to be stabilising which means a growth in sales should have a bigger impact on earnings.

It is also interesting to note that much of this growth is attributable to new stores. This is a good thing and the first signs of big expansion following Wal-Mart's involvement. As these new stores become established in their regions they will become more and more significant. We are still confident that the demand in South Africa and Africa will be more than enough to absorb more expansion. I drove past the Builders Warehouse in Sunninghill on Saturday. There were queues just to get into the parking.


We like Massmart's portfolio of brands targeting almost every sphere in the retail sector. We have always liked this business model even before Wal-Mart got involved. Now that they have the retailing giant behind these brands the company has even more potential.


But what about the share price? It has not done anything for a while. In fact it is down about 2% this year compared to a retail sector which has flown. Be patient with this one. At the moment there are lots of moving parts with big investments being made, sacrificing earnings now with the future in mind. At the moment the share price is waiting for earnings to grow and to justify the large rating it trades on. This, we feel is an opportune time to buy some.