Mar 14, 2017
Massmart could finally be starting to deliver after nearly a decade of less-than-inspiring results.
But the revival of the R91-billion annual sales Walmart-controlled retailer’s fortunes is far from being a slam dunk.
Massmart certainly pleased the market in its annual results announcement of a 15.8% rise in headline EPS (HEPS). This was greeted by a 16% rise in its share price.
Massmart’s pricey 25 p:e indicates that more of the same is expected. A big swing factor will be its ability to continue driving a recovery in its Massdiscounters division, which houses Game, one of the group’s flagship brands.
“Game is key to the Massmart investment case,” says Warren Jervis, manager of the Old Mutual Small & Mid Cap fund.
The signs are positive for the 165-store discount division. It came to the party in 2016, lifting profit before interest and tax (PBIT) by R129m (54.8%) to R364m.
It accounted for just under half the group’s total R264m rise in PBIT to R2.61bn.
The division’s 5.3% rise in sales to R20.5bn was nothing to rave about. Doing the heavy lifting was a rise in the PBIT operating margin from 1.2% to 1.8%.
But there is still a long way to go if Game is to return to its former glory when, at its peak in 2011, it delivered PBIT of R744m and a 5.6% operating margin.
Then the wheels started coming off. Key reasons for this included ageing stores and a failure to keep pace with a rapidly changing consumer electronics landscape. At its worst in 2014, the division’s PBIT stood at R181m.
Jervis believes Game’s recovery still has long legs. “There is no reason it cannot get its margin up to at least 3%,” he says.
It would make a big difference. On a 3% margin, Game’s PBIT contribution in 2016 would have been R615m.
A key factor in upping margins will be the rollout of Game’s SAP point of sale and enterprise resource planning systems.
“It will provide visibility of profit per product line,” says Sasfin Securities analyst Alec Abraham. “It will enable Game to fine-tune its product mix.”
Game’s turnaround was engineered by Massmart veteran Robin Wright, who stepped down as
divisional CEO in August 2016.
Tasked with the next recovery phase is Albert Voogd, who joined Massmart from Ahold, the Netherlands’ largest food retailer.
The selection of Voogd ties in well with Massmart’s big ambitions in food retail. There is already a notable swing in Game’s product mix to food and fresh produce which, together with a recently added liquor offering, accounted for 23% of Game’s sales in 2016.
This was up from 21.8% at the June interim stage.
Abraham agrees that Massmart can continue driving food retail sales at a well-above-market pace. In its favour, he notes, is a small market share of 2%-3% across its Game, Makro, Cambridge and Rhino brands.
But he has concerns about the general state of SA’s beleaguered consumer market.
“It does not support Massmart’s [big-volume, low-margin] business model.”
The signs of strain are already there, not least in the group’s largest division, Masswarehouse, which houses 20 Makro megastores.
While Makro did exceptionally well in 2016 to lift sales by 11%, it came at the cost of big margin pressure; PBIT of R1.25bn came in just 4.4% higher than 2015.
Taking even more strain was the Massbuild division, housing 102 stores under brands including Builders Warehouse and Builders Express. Sales for the year came in 5.6% up at R12.7bn, while PBIT — hit by margin squeeze — was up only 2.7% at R712.6m. More concerning is the fact that second-half PBIT was up a mere 0.7% year-on-year.
For Massmart, 2017 did not get off to a good start. In the eight weeks to February 19 the group reports total sales up a mere 0.6% and comparable (same store) sales down 1.5%.
It represents a significant slowdown against the previous three years. On a comparable sales basis, sales in the first eight weeks of 2016, 2015 and 2014 were up 6.9%, 7.9% and 7.7%, respectively.
Against the likes of Woolworths, trading on a 16 p:e, and even Shoprite on a 20 p:e, Massmart’s 25 p:e is looking decidedly stretched.
By Stafford Thomas for www.businesslive.co.za