Massmart sales update is a little light

Yesterday we saw a Massmart sales update which not only disappointed Massmart shareholders but the whole sector which fell over 2%. The sector is down 1.7% again today and has lost 13% this year. Let's look at the numbers and then the repercussions.


"For the 14 weeks to 31 March 2013, total sales increased by 10.3% and comparable sales increased by 6.0%, continuing the slower sales trends experienced towards the close of the financial year.


The South African consumer environment remains difficult and sales growth may be under some pressure for the remainder of the financial year. If the current sales trends continue, it will be difficult to meet our objective which is to achieve trading profit growth (excluding foreign exchange movements and Walmart transaction costs) equal to sales growth."


I guess what really spooked investors was the deceleration of sales. Massmarts year end is June so this is their third quarter sales figure. For the first 6 months sales had increased 14.7%. That is a fairly sizeable drop in growth. I can't say I am surprised, I have spoken about this extensively. How lower income groups have struggled from a stronger rand and a pull back in unsecured lending. Massmart have huge exposure to the lower LSM groups, especially with their Masscash brands.

If you have been following our posts over the years I am sure you know what I am going to say here. We are in this one for the long term and a speed bump such as the strikes of 2012 (I'm not playing this down, it has had terrible repercussions) is no reason to sell. And that brings me to another point. Clients may ask why we didn't reduce retail exposure when the strikes started happening and the rand started weakening?


The simple answer is that getting in and out of a stock creates extra costs and most of the time you get it wrong. The best way is to ride the wave and in fact add into weakness like we are currently seeing. Only 8% of Massmart sales come from the rest of Africa, the South African exposure is still huge. And when they start diversifying this geographic spread, which they are planning to do, then we should see earnings growth start accelerating again. Getting worried about a deceleration in sales is a short term "investors" worry. We think the long term story is intact, especially when you look at the report Sasha eluded to above, and are happy to carry on adding.


As for the rest of the sector, expect similar updates. Especially from the companies with more exposure to lower income groups. I don't think this trend will continue for one very important reason and it is political. This is the ANC's biggest voting bracket and the ruling government know that all too well. Unfortunately investing in this sector does have political risk so it will be volatile but the lower income bracket is in fact who everyone is fighting to uplift.