Massmart - extracts from business update; trading statement 2019

Johannesburg, Gauteng, SA (July 30, 2019) – For the 26-week period, Massmart's sales of R43.8bn represent total growth of 5.5% and comparable sales growth of 3.6%, with year-to-date product inflation of 2.7%. Total sales growth from our South African (SA) stores was 4.9%, while the same figure from our ex-SA stores was 11.8% in Rands.
       Sales growth slowed noticeably in the six-week period since our previous update issued at the May 2019 AGM, with total growth of 3.3% and comparable growth of only 1.9%. During this six-week period, comparable sales growth slowed in Massdiscounters and Masswarehouse but increased slightly in Massbuild and Masscash.
       Reflecting the difficult consumer environment, margins were lower than anticipated across all divisions in May and June which resulted in a disappointing Group financial performance for the six months to June 2019 as described in the Trading Statement below.
       Detailed information will be provided as usual in the Massmart interim financial results and presentation to investors on 29 August 2019, but some key points per division are noted below. It should be noted that all performance references below are before the impact of IFRS 16.
       For the six months to June 2019, Massdiscounters will report a trading loss of between R395m and R425m, compared to the June 2018 trading loss of R95m. Profits in Game South Africa are below the prior period, but much lower in Game Africa and DionWired. Compounding this are higher costs from the SAP IT project and supply chain and logistics. There have been several changes to the Massdiscounters executive team in the last few months:
  • CEO Albert Voogd resigned with effect from July 2019 and has been replaced, in the interim, by Andrew Stein. Andrew has been with Massmart for 10 years and has worked in both Cambridge and Makro;
• Riaan Turton was appointed as finance director and Kathrine Madley was appointed marketing director; and
• Neville Hatfield has been appointed merchandise director with effect from July 2019. Neville has been the merchandise director at Builders Warehouse since 2006 and prior to that had been the merchandise director at Game.
       Masswarehouse will report trading profit of between R320m and R370m which is 24% to 34% below the prior period. Much of the lower profitability is caused by the soft sales, margin pressure from the lower sales participation of general merchandise and expense growth caused partly by the new Makro store opened in Durban North in March 2019.

Trading Statement for the 26 week period ended 30 June 2019
  Given the above performances, it is estimated with reasonable certainty that for the six months to June 2019 the Group will report an operating loss, before non-trading items, foreign exchange movements and net interest, of between Rnil and R30m.
       This disappointing performance was caused by softer than expected sales, margin weakness and expense growth of approximately 12% (comparable 9%). New stores representing 3.1% additional trading space have been opened since June 2018 and this impacted on employment, depreciation and occupancy costs in addition to cost-inflation.
       African currency weakness has resulted in foreign exchange losses anticipated to be R81m, in comparison to a foreign exchange gain of R23m in the prior period. The losses are caused primarily by recent currency weakness in Zambia and Nigeria.
       Net interest costs will be approximately 18% higher than the prior period figure of R300m.
       The tax charge has been adversely impacted by an inability to raise deferred tax assets in certain ex-South African tax entities and impairing deferred tax assets in some South African and non-South African tax entities.
       Consequently, excluding the impact of IFRS 16, shareholders are advised that Massmart anticipate, with reasonable certainty, the following for the six months to June 2019:
 
Excluding the impact of IFRS16
Estimated June 2019, Restated* June 2018 and Anticipated % change 
Headline (loss)/ earnings (Rm) - (530.0) to (550.4); 204.1; (359.7%) to (369.7%)
HEPS (cents) - (240.5) to (249.8); 94.8; (353.7%) to (363.5%)
Net (loss)/ earnings (Rm) - (582.4) to (602.0); 195.7; (397.6%) to (407.6%)
Basic EPS (cents) - (264.3) to (273.2); 90.9; (390.7%) to (400.5%)

* 2018 results have been restated for the impact of an error in accounting relating to a long term lease, as set out in note 41 of our 2018 Annual Financial Statements.

Shareholders are reminded that the figures and estimates shown above are before adjusting for IFRS 16 which the Group will be reporting for the first time in the June 2019 interim financial results (and which were the subject of a separate investor presentation held on 14 May 2019). The most notable impact of IFRS 16 is, as a result of capitalizing long term leases to the balance sheet and hence recognizing a right- of-use (ROU) asset and related lease liability, that rental charges are removed from profit and loss whilst being replaced by depreciation relating to the ROU asset and accounting interest relating to the liability. Including the impact of IFRS 16, shareholders are advised that Massmart anticipate, with reasonable certainty, the following:
 
Including the impact of IFRS16
Estimated June 2019, Restated** June 2018 and Anticipated % change
  Headline (loss)/ earnings (Rm)# - (774.1) to (794.5); 204.1; (479.3%) to (489.3%)
HEPS (cents) - (351.3) to (360.5); 94.8; (470.5%) to (480.3%)
Net (loss)/ earnings (Rm)# - (826.5) to (846.1); 195.7; (522.3%) to (532.3%)
Basic EPS (cents) - (375.0) to (383.9); 90.9; (512.6%) to (522.4%)
** 2018 results have been restated for the impact of an error in accounting relating to a long term lease, as set out in note 41 of our 2018 Annual Financial Statements but are not adjusted for IFRS 16.
# Included in the impact of IFRS 16 are foreign exchange losses of approximately R76 million relating to the revaluation of US Dollar denominated leases in Africa.
         Massmart's financial results for the six months to June 2019 will be released on 29 August 2019 where a more meaningful proforma financial comparison will be provided in the accompanying results presentation.