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Presentation to Investors, Analysts and Media February 2014

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Presentation on theme: "Presentation to Investors, Analysts and Media February 2014"— Presentation transcript:

1 Presentation to Investors, Analysts and Media February 2014
Dedicated to Value Massmart Reviewed Consolidated Results for the 53 weeks ended 29 December 2013 Presentation to Investors, Analysts and Media February 2014

2 Divisional Performance

3 Massdiscounters 53 weeks 52 weeks growth Comp growth Inflation Sales
R16.7bn 5.7% 1.0% 0.5% Game SA. Comp sales still low (-2.1%): Sales & margin pressure from trading environment, Electronics & clearance Very positive customer response to Fresh & Dry Groceries (+20% comps) Profit significantly below prior year (expense growth > sales growth) Game Africa. Good performance (total sales +22%, own currency +15%) Steady economic environment Some US$-denominated expense pressure Profit growth below sales growth DionWired. Great performance (total sales +20%): Product inflation now. Category slowing down from low product innovation

4 Massdiscounters continued
53 weeks 52 weeks 52 weeks growth Sales R16.7bn R16.3bn 5.7% PBIT R367m R327m -46% PBIT margin 2.2% 2.0% Food / Fresh conversions: 17 converted / opened in 2H. Now in 48 stores, with 13 planned for FY14 New-look Game stores trading well (nine in FY13 and 30 in FY14) Mark Huxtable joined as IT Director and Alan van der Bergh to join as Food Director Trading space +7.7% in FY13 Eight new African stores in FY14-FY15 in Angola, Nigeria, Namibia, Kenya, Mocambique, Ghana & Zambia

5 Massdiscounters Strategic Plans
Broadly, Game SA has three problem areas and our response is: Sales: introduce Food, reduce Electronics’ participation, new categories (Baby & Clothing), customer value proposition, review store portfolio. Wait out the tough environment Margin: greater Food participation, greater F&R reliance to reduce slow- moving stock & mark-downs, private label Expenses: leverage RDC investment Game Africa: More stores. More Food. More property ownership DionWired: Online. Manage store size & portfolio

6 Masswarehouse 53 weeks 52 weeks growth Comp growth Inflation Sales
R19.7bn 12.0% 4.0% 2.1% Very good trading performance in tough environment Pleasing comp sales growth in all categories New stores in Alberton, Jhb, in April and Amanzimtoti, Durban, in Sept (a relocation): Alberton making significant profit contribution but affecting Germiston & Crown Mines stores Amanzimtoti trading well but initially higher costs Food Retail / Fresh offering now in 15 stores. Increases customer visits & spend per basket

7 Masswarehouse continued
53 weeks 52 weeks 52 weeks growth Sales R19.7bn R19.3bn 12.0% PBIT R990m R940m 7.6% PBIT margin 5.0% 4.9% Inventory levels slightly higher due to new stores – will stabilise Fruitspot sales +38%. Now have combination of new & original key management. Playing growing intra-Group role in Gauteng Store pre-opening costs R25m (LY R31m) Trading space +9.3% in FY13, now 19 stores. Seven new stores (& two relocations) since Sept ’11. No new stores in FY14 Group cannibalisation? A new Makro store’s sales in 2nd year are approx. R800m, of which < R100m comes from Group stores

8 Masswarehouse Strategic Plans
Get new stores to trading maturity Widen Baby category Enhance Food Retail offering Commercial customers Online: B2B & B2C Supply Chain & Inventory optimisation Leverage CRM

9 Massbuild 53 weeks 52 weeks growth Comp growth Inflation Sales R9.6bn
10.3% 8.2% 4.1% Another great performance: Good comp sales growth in Warehouse & Express Profit growth well ahead of sales growth Refocused Trade Depot: FY13: closed four stores and converted five stores to Express Converted to Division’s SAP IT platform A core of 15 large stores, regionally dominant, focused on Building Materials including Roof Trusses. Represent approx. 70% of original sales New store openings: six Builders, eight Express & two Superstores. Trading space +3.7%

10 Massbuild continued 53 weeks 52 weeks 52 weeks growth Sales R9.6bn
10.3% PBIT R508m R468m 16.7% PBIT margin 5.3% 5.0% Format innovation: two new Builders Superstores focused on lower-income customers. Positive sales & profit performance. Four more in FY14 Africa: Builders Warehouse performing well in Botswana (two) & Mocambique (two). Closed 10 Kangela satellite stores Opened RDC in Midrand, Jhb, in April ‘13. Superb team execution. New net operating costs of R33m in FY13. Indent opportunity R63m of store pre-opening costs & closure costs (LY R9m) Lizelle Peterson joined as FD Nine new stores in 2014, including in Mocambique (two)

11 Massbuild Strategic Plans
New stores roll-out, including Matola in Mocambique (with Game) Trade Depot: inventory range, IT platform value extraction, contractors Optimise Superstore offering & grow Leverage RDC including W Cape Focus on Trade Customers & B2B Grow Southern Africa store footprint

12 Masscash 53 weeks 52 weeks growth Comp growth Inflation Sales R26.3bn
4.5% 3.8% 4.2% Tough trading environment: Wholesale comp sales +4.1% and Retail +7.8% Competition from independently-owned ex-Metro sites Unexpectedly low product inflation, but now increasing Disorderly market decline but now settling. Trading normalised Opened new Wholesale store in Xai Xai, Mocambique Opened one Wholesale & five Cambridge. Closed three Wholesale & two Cambridge stores. Trading space +0.6%

13 Masscash continued 53 weeks 52 weeks 52 weeks growth Sales R26.3bn
4.5% PBIT R281m R260m -3.5% PBIT margin 1.1% 1.0% Despite good cost control, sales & margin pressure caused profits to decline in Wholesale Masscash Retail trading well. New stores trading above expectation. Strong Cambridge customer brand loyalty & price perception New executives in Wholesale: Anton Smith (Shield & Saverite) and Marlon Reddy (IT) FY14: seven new Cambridge stores

14 Masscash Strategic Plans
Close smaller or less profitable stores. Closed three Cambridge stores in Q1 FY14 New store roll-out Improve Supply Chain & Logistics capability in Wholesale Focus on Saverite Grow Southern Africa store footprint

15 Store Portfolio Massdiscounters Makro Massbuild Masscash Total
December ’12 133 18 85 121 357 Opened 14 2 13 6 35 Closed -4 -1 -5 -15 Sold - December ’13 143 19 92 122 376 Massdiscounters: opened 11 and closed four Game stores; opened three DionWired stores; Makro: opened Alberton and Amanzimtoti; closed Rossburgh Massbuild: Opened six Warehouse; opened five and closed two Express; closed three and sold one Trade Depot; opened two Superstores. Five Trade Depot converted to Express Masscash stores: Retail – opened five, closed two. Wholesale – one opened, three closed

16 SA Retail Environment Recent sales updates – mostly for six months to December 2013. Shows the relative strength of Upper Income compared to Lower Income. Interest rate increase & higher inflation will now impact Upper Income. Another 100bps forecast for 2014. Trading will likely become tougher. Anticipate that the core Builders Warehouse & Builders Express customer may be under financial pressure for first time in several years so watch your costs!!! Sources: company announcements for six months to Dec 13. Cashbuild comps estimated from Q1 & Q2 updates. PnP sales for six month to Aug 13

17 Category Competitors Recent sales updates – mostly for six months to December 2013. Shows the relative strength of Upper Income compared to Lower Income. Interest rate increase & higher inflation will now impact Upper Income. Another 100bps forecast for 2014. Trading will likely become tougher. Anticipate that the core Builders Warehouse & Builders Express customer may be under financial pressure for first time in several years so watch your costs!!! Sources: company announcements for six months to Dec 13. Hi-Fi & Incredible Connection show Total sales. PnP sales for six months to Aug 13

18 Core Profit Growth Rm’s 2013 2012 Change Operating Profit (52 wks)
2 002 1 708 17% Exclude Forex -68 +232 - Exclude Transaction cost in LY +140 Adjusted Operating Profit 1 934 2 080 -7% Exclude store open / close costs +117 +70 “Core” Operating Profit 2 051 2 150 -5%

19 December 2013 Financial Performance

20 Brief Overview of 53 weeks to December 2013
Income Statement: Total 53 week sales growth of 9.8% Total & comparable 52 week sales growth of 7.5% & 3.8% Gross margin decreased to 18.5% (PY: 18.6%) Comparable expenses of 7.2% > comparable sales growth Good results – Makro & Massbuild Poor result – Game SA Operating profit before interest & forex increased by 7.5% 15 December net sales loss of approximately R200 million 20

21 Sales Real comparable volume growth African businesses sales growth:
2013 Rm (53 weeks) 2012 Total % Change Comp % (52 weeks) Inflation Massdiscounters 16 740 15 408 8.6 1.0 0.5 Masswarehouse 19 675 17 201 14.4 4.0 2.1 Massbuild 9 584 8 561 11.9 8.2 4.1 Masscash 26 264 24 669 6.5 3.8 4.2 Total 72 263 65 839 9.8 2.7 Total % Comp 2012 2011 Inflation % Chg % Real comparable volume growth African businesses sales growth: South African Rand grew by 16.6% African Local Currencies grew by 10.9% 21

22 Sales Inflation Higher inflation will be driven by: Weak Rand
YTD Sales Inflation to December 2013 % General Merchandise 0.1 Home Improvement 3.7 Food & Liquor 4.1 Total 2.7 Higher inflation will be driven by: Weak Rand Food inflation Low inflation in General Merchandise 22

23 Gross Profit Margins decreased due to a combination of: 2013 2012
(53 weeks) 2012 Gross Profit (Rm) 13 337 12 276 As % of Sales 18.5% 18.6% Margins decreased due to a combination of: Increased contribution from Game Africa Improved margin performance in Massbuild Both of which were offset by Difficult trading conditions in Wholesale Food Greater overall Food contribution at a lower margin General Merchandise margins in Game SA under pressure 23

24 Operating Costs (excluding forex)
2013 (53 weeks) 2012 Operating Costs (Rm) 11 501 10 407* As % of Sales 15.9% 15.8% * Excludes the R140 million transaction costs Operating costs (excl. forex) increased by 10.5% (52 week +9.2%) Walmart integration costs - treated as normal operating cost Employment costs increased 15.7% (52 week +14.3%) Depreciation & occupancy costs up 10.6% & 11.3%, respectively Pre-opening and closure costs of R117m (December 2012: R70m) Comparable expenses increased by 7.2% 24

25 Employment Costs (47% of total costs)
2013 (53 weeks) 2012 Employment Costs (Rm) 5 423 4 686 As % of Sales 7.5% 7.1% Total increase of 15.7% (52 week +14.3%) Comparable increase of 9.5% Re-allocation of integration costs Increase in staff (FTEs) of 4.2% Result of new stores, HO skills & one new RDC 25

26 Occupancy Costs (22% of total costs)
2013 (53 weeks) 2012 Occupancy Costs (Rm) 2 555 2 296 As % of Sales 3.5% Total increase of 11.3% (52 week +10.8%) Comparable increase of 8.7% 4.8% net new trading space 5.9% net new total space (trading and DC) High inflation - rates, services & electricity Costs should reduce as % of sales from 2014 26

27 Depreciation (6% of total costs)
2013 (53 weeks) 2012 Depreciation (Rm) 731 661 As % of Sales 1.0% Increased by 10.6% (52 week +10.6%) Growth higher than sales growth but stabilising New stores & RDC opened in the period Owned Makro properties 27

28 Forex Gains & Losses Rand weakness compared to African currency basket
Rm (53 weeks) Rm Massdiscounters 82 (241) Other (14) 9 Total Forex Gain/ (Loss) 68 (232) Rand weakness compared to African currency basket Prior year devaluation of the Malawian Kwacha 28

29 EBITDA 2013 Rm (53 weeks) 2012 Rm Change %
Operating profit before forex 2 085 1 940 7.5 Depreciation & amortisation 731 661 Impairment of assets 41 21 EBITDA before forex 2 857 2 622 9.0 29

30 Tax Charge Lower tax rate due to:
(53 weeks) 2012 Total tax (Rm) 555 549 Effective tax rate 29.3% 34.8% Lower tax rate due to: Decreased proportion of non-deductible expenditure No STC in current year Effective tax rate to normalise just below 30% 30

31 Stock & Creditors Stock increased 4.4%. Stock days down slightly:
(53 weeks) 2012 Rm Days Net Stock 10 115 63 9 691 66 Trade Creditors 13 702 75 12 601 Stock increased 4.4%. Stock days down slightly: Improvement in all Divisions other than Massdiscounters Game SA over-stocked - soft comparable sales Trade Creditors days in line with prior year Working capital funding continues to be a key focus area 31

32 Debtors Trade debtors are well controlled throughout the Group
(53 weeks) 2012 Rm Days Gross Trade Debtors 1 919 8.6 1 777 Trade debtors are well controlled throughout the Group Bad debts of 0.04% of sales are closely monitored (2012: 0.09%) No significant concentration of debtors 32

33 Net Capital Expenditure
Rm Rm Net investment to maintain operations 752 629 Investment to expand operations and businesses acquired 1 554 1 035 Total Capital Expenditure 2 306 1 664 Includes: The opening of Makro Alberton & Amanzimtoti The opening of the Builders Warehouse RDC Acquisition of Makro properties 33

34 Capex Capex amounts to 3.2% of sales (December 2012: 2.6%)
Rm Capex amounts to 3.2% of sales (December 2012: 2.6%) Capex, excluding business and property acquisitions, amounts to 1.85% of sales 34

35 Sales Split between Owned and Leased Assets
Sales from owned assets represents 27.3% (December 2012: 12.6%)

36 Cash flow Statement 2013 Rm 2012 Operating cash before working capital movements 2 984 2 681 Working capital movements 752 (775) Cash generated from operations 3 736 1 906 Net interest and tax paid (987) (728) Investment income 79 0.1 Net investment to maintain operations (752) (629) Free cash flow 2 076 549 Dividends paid (913) (864) Investment to expand operations and businesses acquired (1 554) (1 035) Cash outflow before Financing (391) (1 350) 36

37 Dividends Dividend Policy cover = 1.55x
(cents) (cents) Dividend per share 421 Dividend Policy cover = 1.55x Final cash dividend declared of 275 cents per share 37

38 CEO Review

39 Business Performance Summary year in review
Underlying profit performance -7% Strong performances from Massbuild and Masswarehouse Tough trading environment for Wholesale With hindsight, MDD ended better than expected in a weak market Balance sheet and cashflows strong Investments in Food Retail and Supply Chain started to realise value Successful store openings across SA and Africa Significant market share gains in Food Retail Outperformed everyone in Electronics

40 Environment

41 Global Trends specific implications for retail businesses
Massmart Implications Disparity of growth rates Portfolio approach needed Cost pressures Economic headwinds, income disparity & rising costs Customer demand for greater quality and value Expectation of convenience and ease of shop Emerging middle class & continuous rise of women’s purchasing influence Demand for total shopping solutions eCommerce/technology changing customer shopping behavior and experience eCom/Technology and transparency Customer seeking products they can trust Competition responding aggressively Gov’t Intervention, stakeholder influence and role of institutions Growing consumer expectations for doing good business

42 Economic Conditions challenges facing the SA consumer
Increasing Unemployment * Access to Credit Rand Depreciation ** GDP Growth Rate * Sources: * Stats SA ** INET BRIDGE

43 Impact of the Economy changing the way consumers spend
Real Household Expenditure Growth * Consumer Confidence Index ** 2004 2013 Real household expenditure is under pressure and trending downward Consumer confidence index hit a 10-year low; seeing a correlation between confidence and GM sales 10% 10% Durable Goods Semi-Durable Goods Sources: * SARB ** BER & FNB 1/21/14

44 Impact of the Economy changing where consumers spend their money
Source: Stats SA

45 Massmart Shoppers different shopping patterns by income groups
Massmart has offerings across all income levels The highest and lowest income consumers contribute equally to Group sales: The top 1% of households by income (Category A) accounts for 17% of retail expenditure Equivalent to that spent by the bottom 78% of households by income (Category E) Higher-income consumers are less impacted by the economic conditions Lower-income consumers are under extreme constraints; focused on basics and flipping sources of credit Expenditure by middle-income consumers on public and controlled price goods is crowding out spending on discretionary goods

46 Economics Impacting Key Categories retail conditions
Massmart has traditionally been strong in serving the wholesale food customers and is a market leader in general merchandise. Both of these categories are impacted: General Merchandise Changes in mix cause over -stocks and therefore margin pressure Demand for hi-tech and multi-media categories is decreasing Wholesale Food Industry declining Independents changing the way of operating Suppliers changing distribution strategies

47 General Merchandise in the Marketplace Massmart sales performance relative to the market
Although the GM category is under pressure, Massmart sales are ahead of the market Massmart GM outperforming more specialised GM retailers Sources: Massmart Stats SA

48 Wholesale Food in the Marketplace Massmart performance relative to the market
Independents picked up the better ex-Metro stores; mostly inland Distribution patterns have changed as a result Suppliers have invested in new channels Export markets have grown Massmart has gained market share in Liquor and lost a bit in Dry Grocery Massmart has held market shares overall

49 Strategic Priorities

50 Protect and Grow Our Core Diversify Our Sales Mix
Strategic Priorities Protect and Grow Our Core Businesses General Merchandise Wholesale Food Diversify Our Sales Mix Fresh / Retail Home Improvement Private Brands Clothing Expand Our Reach Africa eCommerce New Stores Built on a Foundation of Trust

51 protect and grow in core markets
Strategic Priorities protect and grow in core markets Repositioning of General Merchandise Consolidating Ranges Shrinking Store Sizes Wider Ranges Online Widening Ranges Higher Quality Choices New Categories (Baby) Refocus Range on Middle-income OPP Ownership Re-allocate Space Store Location Optimisation Brand Consolidation New Low-Income Consumer Brand Complete Contractor Solutions Maximize Returns in Wholesale Food Reducing 3rd Party Distribution Growing Commercial Business Exporting Opportunities B2B eCommerce Expansion Optimise Store Portfolio Deepening Customer Value Supplier Partnerships Drive Comp Sales Wholesale Trading Store portfolio review Grow in Africa Supplier JBP process

52 Protect and Grow Our Core Diversify Our Sales Mix
Strategic Priorities Protect and Grow Our Core Businesses General Merchandise Wholesale Food Diversify Our Sales Mix Fresh / Retail Home Improvement Private Brands Clothing Expand Our Reach Africa eCommerce New Stores Built on a Foundation of Trust

53 diversify our sales mix
Strategic Priorities diversify our sales mix Grow in Fresh Retail across all income levels: Makro Game Cambridge Food Win in the Home Improvement Category with Builders: New Superstore EDLP model Drive Comp Sales Wholesale Trading Store portfolio review Grow in Africa Supplier JBP process Clothing: Trialing George in Makro and Game with Baby and Essentials to test future apparel categories Increase Private Label participation across the Group and Divisions to deliver trusted items at a great value

54 Protect and Grow Our Core Diversify Our Sales Mix
Strategic Priorities Protect and Grow Our Core Businesses General Merchandise Wholesale Food Diversify Our Sales Mix Fresh / Retail Home Improvement Private Brands Clothing Expand Our Reach Africa eCommerce New Stores Built on a Foundation of Trust

55 Grow Outside of SA Servicing Customer 2.0 Strategic Priorities
expand our reach Grow Outside of SA Dedicated African team and Forum established City (Power Center) and Country Strategies in place Small format opened in Nigeria – ValuMart 7 stores scheduled to open in 2014 Servicing Customer 2.0 Global Leverage of Walmart.com Skills Acquisition New Makro site launch eCommerce Forum across Functions and Brands B2B eCommerce through Builders and Makro Drive Comp Sales Wholesale Trading Store portfolio review Grow in Africa Supplier JBP process

56 Compound Annual Growth %
Strategic Priorities expand our reach with new stores Massmart Store Pipeline Number of Stores New Area (square metres) Compound Annual Growth % Massdiscounters 33 124,703 8.1% Masswarehouse 1 17,500 2.9% Masscash 27 83,850 6.6% Massbuild 28 87,496 6.7% Total Group 89 313,549 Drive Comp Sales Wholesale Trading Store portfolio review Grow in Africa Supplier JBP process Group Growth Figures 2014 2015 2016 Area Growth 85,050 122,500 105,999 % Growth 6.15% 8.22% 6.49% No of Stores 26 32 31

57 Building Trust a framework to operate by
Products and Services Innovation Workplace Governance Citizenship Leadership Organisation Effectiveness Performance After government, business is the least trusted institution globally Massmart has embarked on a conscious journey to become sub-Saharan Africa’s most trusted retailer We have adopted a trust framework that comprises 8 trust focus areas

58 Building Trust Our strategic plans are built to deliver a trust-worthy brand. Listed below are a few additional ways we build trust within our organisation: Leadership Massmart Corporate University 50 New Graduates CEO’s Women’s Council Citizenship An amount of R50m is committed for 2014   Lethabo Milling company - hopes to launch a private label maize meal Annual Report has been Delivered to the Commission Governance Compliance policies and monitoring in place across all businesses Organisational Effectives Leveraging the ASDA model of We Operate 4 Less to drive efficiencies

59 Prospects

60 Massmart’s 2014 Prospects For the 8 weeks to 23 February 2014, total sales increased by 9.5% and comparable sales increased by 7.7% A much stronger start to the financial year than we anticipated Whilst too early to be confident about this new trend, the strong start suggests a better overall performance this year than last Whilst we remain cautious about the economy, we are much more positive about the business as we reap the rewards from the operational focus of last year

61 Conclusion

62 Conclusion Good 2013 performance given the economic conditions
Excited about the beginning of 2014 sales Transaction, integration and supply chain investments are completed Over the initial growing pains of entering the food retail business Strong growth plan Strong operational disciplines in place to deliver results Cautious about the economy Confident about the company

63 Thank You & Questions

64 Additional Financial Data

65 Reviewed Results for 53 Weeks Ending December 2013
Dec 2013 Rm Dec 2012 Revenue 72 513 66 051 Sales 72 263 65 840 Cost of sales (58 926) (53 563) Gross profit 13 337 12 277 Other income 250 211 Depreciation and amortisation (731) (661) Impairment of assets (42) (22) Employment costs (5 424) (4 687) Occupancy costs (2 555) (2 297) Foreign exchange profit / (loss) 68 (232) Walmart transaction, integration and related costs - (349) Other operating costs (2 750) (2 533) Operating profit 2 153 1 707 Net finance costs (255) (127) Profit before taxation 1 898 1 580 Taxation (555) (550) Profit for the period 1 343 1 030

66 Tax Rate Reconciliation
Dec 2013 % Dec 2012 Standard tax rate 28.0 Non-taxable income and disallowed expenses (2.0) (2.1) Allowances on lease premiums and improvements (0.3) (0.5) Assessed loss not utilised 1.4 1.5 Withholding tax 0.1 (0.7) STC - 3.5 Other – including foreign tax adjustments and transaction related costs 2.1 5.1 Group tax rate 29.3 34.8

67 Headline Earnings Reconciliation
Dec Rm Dec Rm Attributable earnings 972.3 Impairment of assets 41.6 21.6 Loss on disposal of fixed assets 11.9 16.4 Loss on disposal of business 1.8 16.5 Fair value adjustment on assets classified as held for sale - 8.3 Tax effects on adjustments (3.8) (8.1) Headline earnings

68 Capex Per Category Dec 2013 Rm Dec 2012 Rm
Investment to expand operations and businesses acquired (1 307) (1 069) Land and buildings/leasehold improvements (807) (100) Vehicles (35) (40) Fixtures, fittings, plant and equipment (428) (492) Computer hardware (33) (20) Computer software (2) (24) Other (9) Businesses acquired - (384) Net investment to maintain operations (752) (629) (56) (39) (29) (517) (321) (70) (90) (96) (136) 5 3

69 Number of Shares At December 2012 216 910 Shares issued 199
‘000 At December 2012 Shares issued 199 At December 2013 Weighted-average at December 2013 Diluted weighted average at December 2013


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