Results please

Massmart reported numbers yesterday morning for the 53 weeks ending December 29 2013. I was quite struck by an interview on CNBC Africa yesterday with CEO Grant Pattison in which he had said core earnings were flat to down, and a weakening Rand made quite a big difference. But it is tough out there, flat really. Comparable stores, comparable period sales were up around 3.8 percent, wages are a big problem as are rental increases. That said, Massmart managed to keep their employment and occupancy costs in check, a great achievement in this environment.


The Walmart effect that Pattison talks about has gotten to the point where Massmart are in fact Walmart, in terms of the culture. I guess there are far worse companies that you could wish to replicate a culture, Walmart of course are one of the largest companies in the world by revenue. Royal Dutch Shell and Exxon Mobil are right up there. As a retailer they are nearly four and a half times bigger by revenue than Tesco. I guess it is no coincidence then that Walmart employ over 2.2 million people. That is around 100 thousand shy of the Chinese People's liberation army. Liberation from what, I am not too sure.


But back to Massmart, not the very best set of results, revenue increased by only 1.477 billion Rand (72.263 billion Rand in total), and bearing in mind that their new "fresh" business (perishables) is around 1 billion Rand in annual sales, you can see why retailers in South Africa describe the South African consumer as being under pressure and remaining that way for the foreseeable future. Although we will deal with that in a second. There is a big currency translation in the companies favour this year relative to last year when they took a big hit in Malawi. A swing of roughly 300 million Rand, which is why there is a big jump in EPS to 585.1 cents per share for the year. The dividend for the full year totalled 421 cents, 357,85 cents after the 15 percent dividend tax. So, on a simple fundamentals basis, Massmart trades on a 20.4 earnings multiple with a just shy of 3 percent dividend yield at a current share price of 119.40 ZAR.


It has been a tough old 18 months for the lower income groups in South Africa, interest rates are set to start rising too, that will not be helpful. The good news is that the currency has started to stabilise and even going stronger in recent days. Game performed poorly inside of the Massdiscounters segment, the commentary is pretty telling: "Game South Africa which was caught in the very difficult trading environment of selling durable goods to financially challenged low- and middle-income consumers" Game across the rest of the continent (Massmart's preferred brand) performed a lot more admirably, with rest of Africa sales increasing by 14.7 percent relative to a comparable stores sales decline back home of 2.6 percent.


There are some exciting developments to look forward to this year, ecommerce roll outs across the platforms. Expect more fresh food (Cambridge and FoodCo), more clothing and more food merchandising as a whole. Massmart will want to own more of their stores (versus renting) and will set their eyes shutting down stores where the competition means that margins are too tight, that is the way that I understood it anyhow. And continued Africa expansion, that is key to the future of the group. The weakening Rand throws a bit of a spanner in the works when measuring growth in that business, on a comparable same store sales basis it is double figures, and the margins are better. That is what investors, as well as Walmart, obviously see the direction of the group. Having more of a presence in their key African markets, South Africa, Nigeria and Tanzania. The populations lend themselves nicely to expansion.

Here is the outlook part, which is more encouraging: "For the 8 weeks to 23 February 2014, total sales increased by 9.5% and comparable sales increased by 7.7%, a much stronger start to the financial year than we anticipated. Whilst too early to be confi dent about this new trend, the strong start suggests a better overall
performance this year than last year. Whilst we remain cautious about the economy, we are much more positive about the business as we reap the rewards from the operational focus of last year."


The share price last year peaked at 210 Rand and bottomed out earlier in the week at 110 Rand. In part the sellers have been foreigners who have quite quickly shunned emerging markets, whilst local buyers have possibly shunned the company because it was too expensive by historic multiples. If the outlook has improved and if local consumers do not face the headwinds coming (i.e. the currency improves and wards off inflationary concerns and global growth is better), then Massmart is very well positioned. If you have been a long suffering shareholder, hang in there, if there is any solace in the fact that Walmart paid many more Dollars than they could get out at this level. But of course that is not. I am surprised that Walmart are not buying more.