Another day, another excuse. For almost a decade, retailer Massmart has used variations of "the dog ate my homework" to explain its disappointing performance.
Nothing changed in the Walmart-controlled retailer’s 26 weeks to June.
This time round, however, Massmart CEO Guy Hayward had an excuse that seemingly can’t be faulted.
"The six months to June 2017 ranked among the most difficult trading conditions in recent memory, not just in SA but in most of the 12 other African countries where we have stores," Hayward told investors at a results presentation.
Arguably, Massmart looks to have done well to eke out a 2.3% rise in headline EPS (HEPS). Or did it?
Thanks to the wonders of modern accounting there is not always just one HEPS figure to be considered. In Massmart’s case, the inclusion or exclusion of noncash foreign-exchange losses and gains made a big difference in the latest reporting period.
The 2.3% rise in HEPS includes noncash foreign-exchange movements.
They went in Massmart’s favour this time around, with the recorded loss after tax falling 84% to just R13.6m from R85.4m in the comparable 2016 half year.
If foreign-exchange movements are excluded the picture looks very different.
Far from rising, Massmart’s HEPS came in 15.7% down. Operating profit before foreign-exchange adjustments dived by a huge 17.2%.
Whichever HEPS figure investors choose to focus on, it required manning the pumps to achieve.
"We knew we were facing sales and margin pressure so we decided to control the controllables: costs and stocks," explained Hayward.
Total costs across the group were lowered by 0.2% against a 7.5% rise in the first half
of 2016. "It was amazing cost containment," says Alec Abraham of Sasfin Securities. "I was expecting costs to rise by about 7%."
Massmart attacked costs on a broad front, including in-store labour scheduling, reduced shifts in distribution centres, staff number reduction through natural attrition and what it terms "reduction of nonessential activities".
Wonders were also worked on stock levels. "We became very scientific about what we thought would sell more and what would sell less," said Hayward.
It hauled the stock level down from 62 days of sales to 56 days, in the process reducing stock on hand by R955m (8.2%).
It is not clear how much further Massmart can continue along the cost-cutting path.
"Cost cutting will last into the second half of this year and possibly into next year," Hayward told analysts. But Massmart needs something far more fundamental than cost-cutting to reverse what has been a painfully long period of under-performance.
Reflecting this, the retailer’s HEPS in 2016 of 641.8c before foreign-exchange loss adjustments was still 3% below the peak level of 663c recorded in 2008, three years prior to Walmart’s closing of its acquisition of a 51% stake in Massmart for R14.8bn.
Making the situation even more concerning, since 2008 Massmart has increased its number of stores from 242 to 415. Sales in 2016 of R84.7bn were more than double the R39.8bn recorded in 2008." Massmart has a lot of issues that need to be addressed," says independent retail analyst Syd Vianello.
Not least among these is its Massdiscounters division, which is dominated by one of the group’s flagship brands, the 142-store general merchandise and food retail Game chain.
In the latest six months the division limped in with sales down 1.4% at R9.52bn. This was despite a commendable 9.8% increase in food and liquor sales.
Things looked worse at the trading-profit level. It came in 12.8% down at R54.4m.
Given the extreme seasonality of Game’s profit performance, it indicates a potential full-year trading profit of about R320m-R340m or less than half the best-yet R744m, delivered in 2011.
Taking the biggest hit in the latest six months was the Masscash division, which has as its core business wholesaling through 66 Jumbo outlets. The division also houses 58 Cambridge and Rhino food retail stores.
Masscash’s operating profit imploded in the six months, coming in 94.5% down at a negligible R4m on a 1% fall in sales to R14.8bn.
Hayward attributed the abysmal showing to big falls in prices of food commodities such as maize, cooking oil, rice and sugar — which led its small retailer customer base to cut back on purchases in anticipation of further declines.
Be that as it may, the food wholesale business model is in serious question.
Even in a normal year such as 2016, operating margin was a meagre 0.9%. Just seven years earlier the margin was a healthy 3.5%.
The entry of big-name food retailers into townships was the beginning of the end for what was once a thriving wholesale sector, says Vianello.
Results from by far the biggest contributor to Massmart’s profits — Masswarehouse, home to 20 Makro megastores — were also nothing to write home about.
Reflecting harsh margin pressure, the division’s operating profit of R473m was down 6.9% despite a 4% sales rise.
Massmart’s Massbuild division, housing 105 stores under brands including Builders Warehouse, also reflected margin pressure with flat sales producing a 4.9% operating profit fall to R247m.
Hayward holds out hope of the second half of the current year "being a lot better than the first half".
Here an important factor will be stabilisation of currency values in Massmart’s 11 African markets. Falling exchange rates in the first half led to African sales in rand falling 11.9% to R3.5bn. In constant currency terms they were up 2.6%.
Prospects of a better second half have sparked renewed interest in Massmart by ever-hopeful investors, who have boosted its share price almost 25% over the past two months. Price momentum suggests the rise is not yet over.
But is it a share worth chasing?
Massmart itself perhaps provides the answer.
One of its key foundations, declares the retailer, is high volume. Whether it will get the type of volume growth it needs in SA’s depressed retail market appears unlikely any time soon.
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