A trading update for the first half of the year from Massmart on Friday spooked investors who had been banking on a stronger recovery. The share closed over 9% lower at R54.95, having traded as much as down 11% on the day.
While the headline number seems “satisfactory” – sales are up 4.4% – it must be remembered that the group is comparing sales this year to a period last year during which the country was practically shut down for a month, with the level-5 hard lockdown from 27 March through the rest of April. In May, some restrictions were eased, and in June the economy was opened further. Compare the first half of this year to 2019 and sales have dropped 5.7% across the group.
Makro’s R13.7-billion in sales for the 26 weeks are 2.2% higher than the comparable period in 2019. At Builders, sales of R7.2-billion are 7.5% better. The real horror show is in the group’s cash and carry and Cambridge food businesses as well as Game.
Total sales in the cash and carry and Cambridge units is down by 9.8%, or R1.4-billion, when compared to the first half of 2019. This decline was led by Cambridge, which the group has been trying to sell for the last six months. Sales in this business, ranked eighth in food retail in the country, are 9.4% lower than last year.
A far bigger problem, however, looms at Game.
Can Game be fixed?
Massmart says sales at Game were “7.6% lower than the same period last year, with comparable stores sales being 6.9% lower” — this despite half the period being impacted by lockdown last year. (In South Africa, the decline was 4.6%.)
Compare sales at Game to the first half of 2019 (excluding the impact of lockdown), and although there is some impact of “lost” sales due to the closure of DionWired, these are down 19.1%! Game and Dion Wired were part of Massmart’s former Massdiscounters division.
What’s concerning is that at the 19-week mark, trading was “only” 3.3% lower than the same period last year. This means trading over the seven weeks between 10 May and 27 June has been significantly worse than last year.
On R36.5-billion in sales in 2019 and 2020, Game racked up R1.3-billion in operating losses and R923-million in trading losses. Put another way, for every R10 000 in sales, Game has lost R253 over the past two financial years.
Massmart points to “foot traffic in most super and regional malls and retail centres remaining constrained” as a reason for Game’s poor performance, but financial results from landlords show this not to be the case as foot traffic has mostly recovered.
Massmart CEO Mitchell Slape has sold a “reset” of Game to investors (and the easy work has mostly been done). The fundamental question facing Game, however, is whether it has any relevance in 2021.
It has been trying to compete on so many fronts — from TVs and electronics to appliances to dry groceries to sports and leisure to home and DIY, and most recently to clothing basics. In most of these categories, it is nowhere close to being market leader (or top of mind for shoppers).
In 2020, the retailer said it had “achieved overall 230bps” of gross profit margin uplift. But the business remained loss-making. This year, it will report a loss for the fourth consecutive year.
Impairment
In the update, the group said it will book an approximate R570-million impairment on the value of Game’s assets. Considering it only has R9-million in goodwill, this is a big number and one likely not expected by the market. Could the bulk of this be leases?
Will there be substantial Game store closures announced alongside the half-year results at the end of this month?
This chunky impairment brings the total impairments to R1.1-billion since the end of 2020. At year-end it booked a R348.5-million impairment on the value of Cambridge and Rhino and a R175.2-million impairment on the value of Fruitspot. This is likely higher than the cash amount Massmart paid for the latter.
Of further concern is that Massmart says “it is too early to estimate the cost of damage caused by the civil unrest and the subsequent loss of sales. Insurance cover is in place but will not fully offset the losses suffered.”
Of the 43 impacted stores, eight have reopened. Massmart says “with the exception of those stores that sustained structural damage, most stores should be open for business in the coming weeks.”
The problem for Massmart is that two of the worst-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 centres, which would include more hundreds of millions of rand of inventory. Could the stock losses (never mind the lost sales) run into the billions? Most of the group’s Makro properties are on its balance sheet (to own these was a strategic decision taken many years ago).
Are both of these Makros, one of which has been completely destroyed, on the group’s books? The losses are certainly higher than the amount covered by Sasria, but how much higher? How many billions?
The group will report a headline loss of between R591-million and R700-million for the half-year, with a net loss of between R1-billion and R1.1-billion. The latter is an “improvement” of between 1.5% and 11.5% on the lockdown impacted first half of 2020.
R6-billion question
The R6-billion question (the current value of its 51% stake) is how long Walmart will continue to waste management time – and money – trying to fix Massmart.
Its man Slape has already done the easy work: shutting and selling underperforming stores, fixing retail basics in Game, stripping out large chunks of head office costs (by outsourcing central functions to Walmart suppliers) and securing a R4-billion (soft) loan from Walmart to bolster its balance sheet during a Covid-19 impacted year last year. The rampant looting and destruction in July may have been the final straw.
- This article was originally published on Moneyweb and is used here with permission
