Massmart closed R17.96 lower at R115 to value the company at R24.98billion after it said its headline earnings would fall between 58percent to 68percent during the period, while interim profits were expected to ease between 36percent to 46percent.
Chief executive Guy Hayward blamed the situation on adverse socio-economic pressures experienced by lower and middle-income consumers, as well as the relocation of its Game head office to Johannesburg from Durban, which resulted in retrenchments.
“Whilst the positive impact of South Africa’s political renewal has been good for business confidence, there is little sign currently of any economic recovery among our lower and middle-income consumers,” Hayward said.
“Despite continued effective cost-management by Massdiscounters, the current sales weakness will likely cause this division to report estimated earnings before interest and taxes loss of R150m to R170m for the six months to June, before taking the restructuring costs into account.”
The relocation and retrenchments cost the company R116m, but Massmart said that they will ultimately save R52m annually. Consumer confidence in South Africa surged to an all-time high in the first quarter of the year, indicating the willingness of consumers to spend more, following the election of Cyril Ramaphosa as head of state.
The First National Bank (FNB)/Bureau for Economic Research (BER) consumer confidence sentiment index raced to 26points in the first quarter of 2018 from -8points in last year’s fourth quarter.
The increase is the largest single quarter improvement since BER started publishing a composite index in 1982. It also dwarfed the previous record high of 23 index points reached in the first quarter of 2007.
Last month Statistics SA said retail sales in the first quarter of the year fell 0.7percent, following a 2.2percent rise in the previous period.
Aeon Investment Management chief investment officer Asief Mohamed said retrenchments and job cuts, particularly in the mining sector, had dampened the outlook for consumer spending in South Africa. “Massmart and other retailers will be forced to cut costs further and likely incur significant restructuring costs and/or rationalise sales space that is not profitable in an increasingly competitive environment,” Mohamed said.
“The current restructuring costs of Massmart may not be sufficient to make it more competitive in the long-term.”
The group said sales rose 0.8percent to R31.4bn in the first 19 weeks of the year, with the liquor section increasing 6.9percent, while home improvements improved 6.1percent.
Year-to-date online sales inched 66 percent higher compared to the prior period while sales in the food division fell 2.3 percent.
Fund manager at Ashburton Investments Wayne McCurrie said home improvement lifted an otherwise dampened period for the group.
“They (Massmart) are not seeing any improvements in the middle to lower income group spend. Store on store sales also very disappointing,” McCurrie said.
- BUSINESS REPORT