Massmart, it is still early days

This morning we received results from Massmart for the 26 weeks ended 23 December 2012. Remember they released an update a few weeks ago which showed us more or less what earnings were going to look like, I covered it here, Massmart trading update, building for the future. Well no more speculation, here is what the company has done in the past 6 months.


"For the 26 weeks ended 23 December 2012, Massmart's total sales increased by 14.7% over the prior comparative period, while operating profit and headline earnings declined by 17.7% and 21.2% respectively. Excluding costs relating to the Wal-Mart transaction and integration, which include the additional R140 million related to the Competition Appeal Court ruling, and foreign exchange movements, operating profit increased by 6.1% and headline earnings by 5.8%.


Comparable sales increased by 7.3% and period-weighted product inflation was 3.7% reflecting positive volume growth for the Group. There was evidence of slower growth amongst middle- and lower-income customers towards the end of the period."


If you read my piece on the update you will get the fundamental analysis of the numbers which assumed earnings of 438c, the actual number came in at 424c but as I have said before I am not too fazed with valuations at this stage. Let's look at what is happening within the company to get a real feel for the business, starting with the divisions.


Massdiscounters which compromises 114 stores namely Game and Dion Wired along with 27 Foodco stores (these are grocery retailers similar to Pick n Pay and are being opened up within Game stores) grew sales by 7.7%. Profits dropped 14.8% due to slow sales at Game and higher input costs due to the new stores being rolled out. This division is where the company is really targeting Africa with exposure to Botswana, Ghana, Lesotho, Malawi, Mozambique, Namibia, Nigeria, Tanzania, Uganda and Zambia.


Masswarehouse which compromises 18 Makro stores increased comparable sales by 8.6%. 5 new stores were opened which resulted in sales growth of 23.5%, that is what I like to see. Trading profit increased 12.7% despite costs amounting to R28 million to open up those stores. Massbuild which now has 85 stores increased comparable sales by 9.7% while profits increased 23.6% thanks to good management initiatives. They look to open up a Builderswarehouse in Mozambique and one in Zambia as well as a second one in Botswana. Only one store was added in this period.

Masscash which compromises 70 wholesale and 44 retail Cash and Carry stores grew sales by 15.3%. Trading profit increased by 19.4%. This included the acquisition of the Rhino brand which helped sales significantly. Same store sales were up 8.6%.


The future of this company excites me. They are completely revamping their supply chain with 3 new Massdiscounter distribution centres (DC), three Makro regional warehouses, 1 Cambridge DC and one Massbuild central DC. I have been to one of these, they are very impressive. This is obviously Wal-Mart preparing the company to literally supply a continent.


In the prospects section sales for the 8 weeks to 17 February have increased 11.4% even though the South African consumer remains under pressure. They all say that. Although I do feel the consumer is under more pressure than the last few years, we are still seeing double digit growth. The rest of Africa only contributes 7.3% to total sales and I expect this to pick up rapidly over the next few years.


The company is in massive expansion mode, they have the right business model to supply the continent with goods and certainly the right partner. We will continue to add to this stock.