Wednesday, January 19

Will Walmart abandon Massmart as things go from bad to worse?


A business update for the first half of the year from Massmart on Friday spooked investors who had been counting on a stronger recovery.

The stock closed more than 9% lower at R54.95, having traded up 11% less on the day.

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Although the number of the headline seems ‘satisfactory’, sales rose 4.4%, it must be remembered that the group is comparing sales this year with a period last year during which the country was practically closed for a month , with the hard lockdown of Level 5. from March 27 to the rest of April. In May, some restrictions were relaxed and in June the economy opened up even more. Compare the first half of this year to 2019 and sales are down 5.7% across the group.

Makro’s R13.7 billion sales over the 26 weeks are 2.2% higher than the comparable period in 2019. At Builders, R7.2 billion sales are 7.5% better.

The real horror show is in the group’s cash and carry and Cambridge food stores, as well as Game.

Read:

Massmart to sell Cambridge Food, Rhino and Massfresh

The fresh food game at Massmart’s largest chain is over

Total sales in the cash and carry and Cambridge units were down 9.8%, or R1.4 billion, compared to the first half of 2019. This decline was led by Cambridge, which the group has been trying to cope with. sell during the last six months. Sales of this business, eighth in food retail in the country, are 9.4% lower than last year.

However, a much bigger problem looms in Game.

Can the game be fixed?

Massmart says sales at Game were “7.6% lower than in the same period last year, and comparable store sales were 6.9% lower,” despite the fact that half the period! was affected by the closing of last year! (In South Africa, the decrease was 4.6%).

Compare the sales on Game to the first half of 2019 (excluding the impact of the lockdown), and while there is some impact from the ‘lost’ sales due to the closure of Dion Wired, they are down 19.1%!

Game and Dion Wired were part of Massmart’s former Massdiscounters division.

What is concerning is that at the 19-week mark, trade was “only” 3.3% lower than in the same period last year. This means that trading during the seven weeks between May 10 and June 27 has been significantly worse That the last year.

With R36.5 billion in sales in 2019 and 2020, Game accumulated R1.3 billion in operating losses and R923 million in business losses.

In other words, for every R10,000 in sales, Game has lost R253 in the last two financial years.

Massmart points out that “pedestrian traffic in most of the super and regional shopping malls and retail centers remains[ing] Limited ”as a reason for Game’s poor performance, but the financial results of the owners show that this is not the case, as foot traffic has mostly recovered.

Massmart CEO Mitchell Slape has sold a “reboot” of the game to investors (and the easier job has already been done).

Read: Massmart CEO Points to ‘Ridiculous’ Rent Escalations

However, the fundamental question facing Game is whether it will have any relevance in 2021.

It has been trying to compete on many fronts, from televisions and electronics to home appliances, dry groceries, sports and leisure, home and DIY, and more recently, basic clothing. In most of these categories, it is by no means the market leader (or the most important thing to buyers).

In 2020, the retailer said it had “overall achieved 230 basis points” of increased gross profit margin. But the business continued to be in deficit. This year, it will report losses for the fourth year in a row.

Increasing deficiencies

In the update, the group said that it will record an impairment of approximately R570 million in the value of Game assets.

Considering you only have R9 million in goodwill, this is a large number and probably not expected by the market. Could most of this be leases?

Will substantial game store closings be announced along with semi-annual results later this month?

This large impairment brings the total impairment to R1.1 billion from the end of 2020. At the end of the year it recorded a R348.5 million impairment in the value of Cambridge and Rhino and a R175.2 million impairment in the value of Fruitspot . This is likely higher than the cash amount Massmart paid for the latter.

Looting losses not yet quantified

More worrisome is that Massmart says that “it is too early to estimate the cost of the damage caused by civil unrest and the consequent loss of sales. There is insurance coverage, but it will not fully compensate for the losses suffered. ”

Of the 43 affected stores, eight have reopened.

Massmart says that “with the exception of stores that suffered structural damage, most stores should be open in the next few weeks.”

The problem for Massmart is that two of the most affected stores are Makros (in Springfield and Pietermaritzburg). Each will have had (and lost) hundreds of millions of rand in inventory.

The group also lost two distribution centers that would include more than hundreds of millions of rand of inventory. Could stock losses (regardless of lost sales) run into the billions? Most of the group’s Makro properties are on balance sheet (owning them was a strategic decision made many years ago).

Read: The Scale of Destruction

Are both Makros, one of whom has been completely destroyed, in the group’s books? The losses are certainly higher than the amount covered by Sasria, but how much more? How many billions?

The group will report an overall loss of between R591 million and R700 million during the half, with a net loss of between R1 and R1.1 billion. The latter is an ‘improvement’ of between 1.5% and 11.5% in the blockade that was affected in the first half of 2020.

The R6 billion question (the present value of its 51% stake) is how long Walmart will continue to waste management time, and money, trying to fix Massmart.

Your man, Slape, has already done the easy job: closing and selling underperforming stores, fixing the basics of retail on Game, eliminating large chunks of head office costs (outsourcing core functions to Walmart vendors) and get a (soft) loan of R4 billion from Walmart. to reinforce its balance during a year affected by Covid-19 last year.

The rampant looting and destruction in July may have been the last straw.


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