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Massmart net profit up despite costs

Nompumelelo Magwaza and Bloomberg

Massmart Holdings’ profitability was under pressure because of the costs of expansion and of selling control to Walmart, it said. Massmart is South Africa’s biggest food and general goods wholesaler.

Net income rose 21 percent from a year earlier to R893 million in the fiscal first half to December 25, the company said yesterday. Sales increased 15 percent to R31.5 billion. Trading profit, or earnings before interest, taxes and some financial items, rose 4 percent to R1.34bn.

Over the past six months, Massmart had dealt with changes including opening new stores, the completion of the Rhino Cash and Carry acquisition, and the integration with Walmart, the company said.

According to the retailer, these processes contributed to a massive 14.4 percent increase in its operation costs.

Massmart chief executive Grant Pattison said while the retailer had been busy, the results proved that it managed to keep its eyes on the ball.

“It has been a very busy six months, with management focused on maintaining operating momentum while also implementing the Walmart integration process.

“We are pleased with our trading performance, in particular an apparent gain in overall market share and we are confident that the current period of investment will be good for the company,” he said.

On the much anticipated acquisition of Massmart by the US giant retailer Walmart, the group said it was still waiting for a court ruling on the deal.

The retailer’s investments in the past six months had resulted in a 6 percent increase in space growth and the number of total stores stood at 330 in 12 sub-Saharan African countries. The company spent R752.2m, a 33 percent increase, in replacement and expansion costs.

This included investments in Cambridge’s supply chain and infrastructure, and the rollout of FoodCo and three Makro stores. Its mass discounters, comprising Game and DionWired, increased sales by a combined 11.8 percent. However, Massmart said sales at Game in South Africa were lower than expected as a result of financial pressure on middle-class consumers.

The FoodCo stores, which analysts said would find difficulty in competing with big retailers such as Shoprite and Pick n Pay, continued to expand with 15 stores, of which two opened outside South Africa.

Syd Vianello, an analyst at Nedbank Capital, said with all the reasons stated by Massmart on its high operations costs, the numbers still looked weak.

He said the cost of operations reared its head throughout the statement and was a sign that the company was probably engaged in many financial and time-consuming projects. He said this was also reflected in their margins.

Vianello cautioned the market, saying that Massmart’s entrance into the food sector could take years to show results. He said Massmart’s Rhino Cash and Carry deal was the last of its kind and all that the group could now do was to roll out new stores.

Although Pattison agreed with Vianello, he stated that Massmart and Walmart were looking to create a R10bn base in the food sector within the next five to 10 years.

Makro, which falls under the Masswarehouse division, did not disappoint, with sales increasing by 18.3 percent and trading profit increasing by 12.4 percent.

The group’s margins decreased from 18.06 percent to 17.70 percent.

Pattison said the group would now move on to buying structures and roll out new stores. The company had created 3 500 jobs last year.

Massmart shares closed 0.6 percent higher at R181.51.

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