Key issues:

  • Continued low product inflation
  • Effective cost control
  • Higher occupancy costs and depreciation
  • Effective working capital management
  • Highest capital expenditure levels

Financial impact of Walmart transaction

The Walmart transaction became effective on 20 June 2011 at which time Walmart acquired 51% of Massmart’s issued shares, on a fully diluted basis, for a cash consideration of R148 per share. The Competition Commission and the Competition Tribunal have approved the transaction. The only outstanding issue remains that of the Supplier Development Fund, which is covered in the CEO review.

During the 2012 year, the Walmart transaction, integration and related costs amounted to R185.4 million. These costs included the costs of the Walmart expatriates currently operating in the Group, other related employment costs, the cost of integrating and aligning systems and the cost of sending 368 staff members, at all levels of the Group, to the Walmart Annual Shareholders’ Conference in Bentonville. In the 2011 financial year, the total transaction cost amounted to R408.8 million, which included advisor’s fees and expenses of R238.7 million, the establishment of the R100.0 million Supplier Development Fund (required by the Competition Tribunal) and R70.1 million in accelerated IFRS 2 Share-based Payment charges. Going forward, this cost should normalise at around R50.0 million a year from the end of 2013. The benefits of the transaction, while difficult to quantify, have been substantial. To date, these have largely been intellectual and soft benefits assisting the Group with its strategic journey into Food Retail, leaning on the experience of Walmart as we roll out our supply chain and logistics strategy, including the roll-out of the Regional Distribution Centres (RDCs), the beginning of the Group’s direct-to-farm process and most recently the introduction of some new private label brands, including the “Great Value” brand.


During the year, the Group acquired two businesses, being Fruitspot and the Rhino Cash and Carry Group. Both of these acquisitions are aligned to the Group’s strategy of rolling out Food Retail. Makro acquired Fruitspot with effect from 2 January 2012 and Cambridge acquired the Rhino Cash and Carry Group with effect from 1 March 2012. Together these acquisitions amounted to a net cash purchase price of R326.7 million and gave rise to goodwill of R485.2 million. Liabilities raised on the business acquisitions of R182.3 million are dependent on these businesses achieving certain profit hurdles in the next two years.


During the financial year, the Group disposed of the Score stores acquired in 2009. The loss on disposal amounted to R12.1 million. A small cash and carry business in Mozambique is in the process of being sold. The assets and liabilities have been revalued to the lower of carrying value and fair value less costs to sell and disclosed separately as non-current assets or liabilities classified as held for sale in the statement of financial position.

Accounting policies

There were no significant changes in accounting policies during the year.

Financial targets

The Group has medium-term financial targets or measures that we believe represent optimal performance levels within the income statement, statement of financial position, or the combination of both. Certain of these targets are ‘stretch targets’ that will only be achieved in the medium term. In addition, these targets are also ‘through-the-cycle’ targets, meaning that during a strongly negative or positive economic environment, we may under- or over-perform against those targets.

These target ratios are shown below:



The financial targets are intended to apply in a benign to positive economic environment, ie one representing the ‘average’ growth rate of an economic cycle.

Medium-term target ratios   Definition
ROS > 5.0%   Return on sales (ROS) is the ratio of profit before tax, excluding Walmart costs and foreign exchange amounts, to sales
ROE > 35%   Return on equity (ROE) is the ratio of headline earnings excluding Walmart costs, to average ordinary shareholders’ equity
Gearing ≈ 30%   Gearing is the ratio of average long-term interest-bearing debt to average ordinary shareholders’ equity
Dividend cover of x 1.55   Dividend cover represents the ratio of headline earnings to dividends paid to ordinary shareholders

Return on sales (ROS)

This ratio combines all the key income statement elements, being sales, gross margin, supplier income, expenses (including depreciation and amortisation), and net interest, but excludes Walmart costs and foreign exchange translation gains or losses. Every key financial aspect of the retail or wholesale business model is therefore captured in this ratio. In addition, the largest asset investment in the Divisions is net working capital (being inventory and trade receivables), less the associated funding liability (in trade payables). The relative success of management’s impact on net working capital will therefore be reflected in changed net finance charges or receipts from one year to the next. The reason foreign exchange translation gains or losses are excluded is because they are largely well beyond management’s control, are volatile, and do not reflect the sustainable profitability of the Division or Group.

Returns for 2012 were negatively impacted by the increased depreciation and occupancy costs. These costs comprised approximately 6.5% and 22.4% of total costs and increased by 24.8% and 23.7%, respectively. The increased depreciation and occupancy cost is a consequence of the Group’s significant increase in RDCs, the roll-out of new stores including three new Makros during the year and the introduction of Food Retail to three Divisions.

Massmart's current ROS is 3.4% (2011: 3.7%).

Return on equity

Massmart is committed to delivering superior returns to shareholders over the longer term. The Group’s medium-term targets are to exceed a 35% return on average ordinary shareholders’ equity (ROE).

The decline in the Group’s profitability (measured by ROS) during the economic recession in 2009 and 2010 was the main cause of the decline in the Group’s return on shareholders’ equity. This was also affected by the Group’s ongoing investment in new stores and new businesses which increased the size of the net asset value. As the Group’s profitability improves, and as the new stores and business begin to trade optimally, the ROE will improve to higher levels. In 2011 and 2012, the significant strategic investment in capital assets already discussed caused the ROE to remain at lower levels.

Massmart’s current return on average shareholders’ equity (excluding Walmart costs) is 32.8% (2011: 33.7%).

The Divisions are responsible for delivering operational returns, being their returns to their net working capital and non-current assets excluding goodwill and trademarks. In addition to these operational returns, Massmart, through the Board and Executive Committee, is responsible for delivering investment returns that will also include the book value of intangibles (specifically goodwill arising from acquisitions), as well as setting the Group’s gearing levels that will influence returns to shareholders and the overall risk profile. Depending upon the purchase price, retail and wholesale acquisitions tend to generate significant accounting goodwill owing to the relatively low net asset values of these business models.

The Divisions are recapitalised annually by Massmart with non-interest-bearing shareholders’ funds that are equivalent to the book value of long-term assets in each Division. Each Division must therefore fund its net working capital position through cash or interest-bearing debt, depending upon the characteristics of that business model. This process enables divisional returns to be evaluated and compared on a consistent basis across the Group, and from one year to the next. This policy has not been rigidly applied in Masscash owing to minority shareholders in that business, although interest income from one year to the next is generally comparable.

Gearing (or leverage)

Rm 2012   2011
Gearing 38.9%   39.9%
Average interest-bearing debt for
the year
1,618.8   1,484.8
Average capital
and reserves
4,161.4   3,717.8

Average interest-bearing debt is calculated by grossing up the net interest paid of R115.1 million (2011: R107.2 million) by the average interest rate of 7.11% (2011: 7.22%).

Massmart prefers some gearing, of approximately 30%, in order to leverage the return on shareholders’ equity but without introducing excessive financial risk to the Group. Given the Group’s high cash generation and our historical preference for leasing rather than owning our stores, it is difficult to permanently or meaningfully gear (ie maintain a net interest-bearing debt position) the Group over the long term. It should be noted here however, that our stores’ lease obligations represent a significant form of permanent gearing (these lease obligations currently represent a discounted present value of approximately R6.5 billion (2011: R5.5 billion)).

From 2008, the Group decided rather to own than lease certain of its larger stand-alone store formats, specifically Makro and Builders Warehouse stores, and this will add incrementally to the Group’s gearing. This change does not however, represent a major financial shift as all it will be doing is converting a fixed long-term lease commitment, which is recorded off-balance sheet, to an on-balance sheet asset or liability. As regards to financing any acquisitions, depending on the target company’s cash profile and cash generation ability, this gearing ratio may be increased.

In addition to the above, the Group is continuing with its strategic drive of investing for the future. This includes the roll-out of Food Retail across three of the Divisions, the roll-out of new stores, including the continued roll-out of new Makro stores and the opening of new RDCs. This has the effect of pushing the gearing levels up in the short term.

As the period-end statement of financial position tends to be unrepresentative of the Group’s average net cash or debt position during the year (including higher cash balances that are paid to creditors after month-end), the Group’s gearing levels are best calculated using the net interest paid (or received) for the financial period.

The Group’s average gearing was 38.9% (2011: 39.9%) for the financial year.

Dividend cover

Massmart’s previous dividend policy was to declare and pay a total annual cash dividend representing a 1.70 times dividend cover ratio. The reference point for the calculation is headline earnings, which includes the effect of the Thuthukani IFRS 2 charge and associated dividend. No adjustment is made to the dividend calculation for the unrealised or non-cash portion of any foreign exchange translation gain or loss, unless these figures become material.

In light of the new South African Dividend Tax introduced with effect from 1 April 2012 (Dividend Tax), the Group’s dividend cover has been adjusted to reflect the benefit to the Company of no longer paying the Secondary Tax on Companies (STC) on the net dividend. Consequently Massmart’s new dividend policy is to declare and pay a total annual cash dividend representing a 1.55 times dividend cover unless circumstances dictate otherwise.

This ratio is not a target – because it is already being achieved – but is disclosed to give shareholders clarity on future dividend levels. The Board believes that this dividend cover ratio is appropriate, given the Group’s current and forecast cash generation, planned capital expenditure and gearing levels.

Historical actual dividend cover ratios:

  2012   2011   2010   2009   2008   2007   2006   2005   2004
× 1.59*   × 1.59*   × 1.46   × 1.55   × 1.70   × 1.70   × 2.00   × 2.00   × 2.00

* This was calculated using headline earnings before Walmart costs (taxed).

Income statement



More detail on the consolidated
income statement and related notes
can be found in:



More detail on the operational
performance can be found in:

  % change
Sales   61,209.1    52,950.1    15.6 
Gross profit   11,252.0    9,668.3    16.4 
Gross margin   18.4%    18.3%     
Other income   153.8    139.4    10.3 
Expenses   (9,198.7)   (7,676.7)   (19.8)
Operating expenses as a % of sales   15.0%    14.5%     
Trading profit   2,265.3    2,182.9    3.8 
Trading profit as a % of sales   3.7%    4.1%     
Foreign exchange loss   (72.5)   (72.3)    
Operating profit before Walmart costs   2,134.6    2,058.7    3.7 
Walmart transaction, integration and related costs   (185.4)   (408.8)    
Loss on disposal of Makro Zimbabwe (note 8)   –    (38.6)    
Operating profit   1,949.2    1,611.3    21.0 
Operating profit as a % of sales   3.2%    3.0%     
Finance costs   (183.9)   (140.4)   (31.0)
Finance income   68.8    33.2    107.2 
Net finance costs   (115.1)   (107.2)   (7.4)
Profit before taxation   1,834.1    1,504.1    21.9 
Profit before taxation as a % of sales   3.0%    2.8%     
Taxation   (618.2)   (585.3)   (5.6)
Profit for the year   1,215.9    918.8    32.3
Headline earnings:            
Including Walmart costs   1,216.7    881.9    38.0
Excluding Walmart costs   1,363.6    1,252.7    8.9
Headline earnings per share (cents):      
Including Walmart costs   564.5    433.3    30.3
Excluding Walmart costs   632.6    615.5    2.8



Comparable sales are sales figures quoted for stores that have traded, and will trade, for all 12 months of both the current and prior year. These stores’ sales would therefore exclude new store openings or closings in the current and prior year.


New space has not been proportionately adjusted if the store was only open for part of the financial year.


Total Group sales for the 2012 financial year amounted to R61.2 billion. Total and comparable store sales for the 2012 financial year increased by 15.6% and 9.6%, respectively. The Group’s average product selling price inflation rate for the year was 1.8% (2011: -1.3%). Inflation/deflation for each of the Group’s major product categories is shown in the table alongside.

The effect of General Merchandise being in deflation throughout the year is that the Group needed to move greater volumes of boxes in order to achieve an equivalent amount of Rand sales.

Looking ahead to December 2012, some inflation is expected to return to General Merchandise, although this will likely be marginal. Food inflation is likely to increase significantly in the short term, mainly as a result of global supply shortages of many commodities, including maize and oil. If the Rand remains stable, product inflation should increase towards 4% – 6%.

During the 2012 financial year, the Group opened 25 stores, closed five stores, and acquired 15 stores, resulting in a total of 348 stores. Net trading space increased by 7.3% to a total of 1,350,300m2.

Gross profit

The Group’s gross margin of 18.38% is above the prior year’s 18.26%. The increase is a result of improved gross margins in Massbuild and a higher contribution from Game Africa. These increases however, were offset by a greater Food contribution across the Group.

The Group’s gross margin is dependent upon the sales mix across the Divisions and the required trading aggression occasioned by competitor activity. In a positive economic cycle, it should increase marginally owing to the increased contribution from the higher-margin Massbuild Division, as well as a higher proportion of General Merchandise sales. Gross profit includes rebates and other forms of income earned from suppliers as well as ongoing revenue from sales of cellular products and airtime.

Other income

Other income of R153.8 million (2011: R139.4 million) comprises royalties and franchise fees from in-store third parties, property rentals, investment income excluding interest, sundry third party management and administration fees, distribution income and income from insurance premium contributions.




Employment and occupancy costs together represent 69.5% of the Group’s total expenses.

  % change
Depreciation and amortisation (594.2)   (476.3)   (24.8)
Impairment of assets (16.5)   (10.0)   (65.0)
Employment costs (4,336.1)   3,766.3)   (15.1)
Occupancy costs (2,059.9)   (1,664.7)   (23.7)
Other operating costs (2,192.0)   (1,759.4)   (24.6)
Total expenses (9,198.7)   (7,676.7)   (19.8)

Due to the new stores, specifically the three new Makro stores, the investment in Food Retail’s supply chain and infrastructure, and IT upgrades across most Divisions, total expenses (excluding foreign exchange losses) increased by 19.8%. The impact of the Group’s continued investment in growth can be seen in the 24.8% higher depreciation and amortisation charge and the 23.7% increase in occupancy costs. Comparable expenses remained well controlled and increased by 7.0%.

Total expenses represent 15.0% of sales, an increase compared to the prior year’s 14.5%. The major expense categories and significant expenses included in total expenses are discussed in more detail below.

Employment costs, the Group’s single largest cost category at 47.1% of total expenses, are 15.1% higher than the prior year. As a percentage of sales, employment costs decreased marginally to 7.08% (2011: 7.11%). On a comparable basis, these costs increased by only 11.9%. Included in employment costs are IFRS 2 Share-based Payments charges of R66.1 million (2011: R110.7 million) which arise from shares and options issued to beneficiaries of the Massmart Employee Share Trust, the Thuthukani BEE Staff Scheme and Black Scarce Skills Trust. The Group employed 10.7% more employees (on a full-time equivalent basis or FTE and excluding acquisition FTEs) compared to 2011, increasing as we opened new stores and from acquisitions.

For the forthcoming financial year, the Group’s salary increases are between 5.0% and 7.0% and wage increases, which have all been finalised, are in a range of 7.0% and 8.2%.

Occupancy costs, the Group’s second biggest operating cost at 22.4% of total expenses, increased by 23.7%. On a comparable basis, these costs increased by 13.1%.

Property lease costs comprise 67.8% of total occupancy costs, the balance comprises ancillary property costs including municipal rates and services which continue to increase in excess of national South African inflation levels. Expressed as a percentage of sales, occupancy costs, at 3.4%, are higher than the prior year equivalent of 3.1%. The Massdiscounters RDCs, the opening of new stores, including three new Makro stores, and the roll-out of Food Retail across the Group resulted in the high increase in occupancy costs. As Makro continues on its aggressive new store roll-out coupled with the continued roll-out of RDCs, this Group ratio is likely to deteriorate slightly over the next 18 months.

The lease-smoothing accounting policy applicable to operating leases (thereby affecting all store leases) has the effect of keeping comparable-store lease charges broadly equal from one year to the next, and so any increase in property lease costs between the years would be from new stores. Another effect of this accounting policy is that annual lease escalations no longer increase the Group’s lease charge. Adjusting for the non-cash lease-smoothing adjustment in both years shows that annual cash occupancy costs increased by 22.2% while total trading space increased by 7.3%.

Depreciation and amortisation is the Group’s third largest cost category and represents 6.5% of total expenses. Owing to the accelerated capital investment in new stores and RDCs, the depreciation and amortisation charge increased by 24.8% which is well ahead of sales growth, and will continue to increase ahead of sales growth, for the next 18 months due to the Group’s capital expansion programme. Most Divisions refurbish their stores on a regular basis, resulting in steadily higher depreciation charges.

The three major cost categories described above together represent 76.0% of the Group’s total expenses. Other operating costs represent every other item of expense in the Group, including insurance, bad debts, travel, professional fees, advertising and marketing, stationery and consumables. Combined, this category represents the most manageable or variable, costs and so while total costs in this category increased by 24.6%, comparable costs increased by only 6.3% due to intense management focus.

Other significant items

As noted in the summarised income statement above, included in operating profit are net unrealised and realised losses on foreign currency transactions and translations of R72.5 million (2011: net loss of R72.3 million).

Rm 2012   2011   % change
Operating profit before Walmart costs 2,134.6    2,058.7    3.7
Depreciation and amortisation (594.2)   (476.3)   24.8
Impairment of assets (16.5)   (10.0)   65.0
EBITDA 2,745.3    2,545.0    7.9
Occupancy costs (2,059.9)   (1,664.7)   23.7
EBITDAR 4,805.2    4,209.7    14.1

During the 2012 financial year, the translation of the Group's African balance sheets accounted for R124.7 million of this (2011: R52.2 million loss) and there was a net translation gain from other foreign monetary balances of R52.2 million (2011: R20.1 million loss). During May 2012, the Government of Malawi devalued the country’s currency by 50%. The effect of this (included above) was a loss on translation of the loans in Malawi which amounted to R145.6 million. This loss was offset by the Rand weakness compared to the Group’s African currencies basket. Should the Rand weaken against these currencies, it is likely that the Group will report foreign exchange gains.

More detail is provided in note 7 and note 39 on the nature of the Group’s foreign currency exposure, particularly with regard to the African stores.

When a new store is opened, large once-off or exceptional operating costs can be incurred in preparing the store (including temporary staff, marketing initiatives, special promotions, signage, amongst others). These costs are referred to as store pre-opening costs and in 2012 amounted to R82.0 million (2011: R43.2 million) which included the new Makro stores. Store pre-opening costs are likely to remain high as we continue to roll out new Makro stores and Food Retail across the Group.

Trading and operating profit

Group trading profit, which is shown before accounting for the Walmart costs, grew by 3.8% which is significantly below sales growth of 15.6%. The Group’s lower net margin growth is a result of expense pressure due to investing in new stores and RDCs and the additional costs resulting from the need to move additional volumes due to deflation in General Merchandise. Expressed as a percentage of sales, Group trading profit deteriorated from 4.1% to 3.7%.

Group operating profit before Walmart costs, which includes the foreign currency translation movements, was 3.7% above the prior year.

The Group’s 2012 financial performance has been covered in detail above, but can broadly be summarised as:

  • Total sales growth boosted by new stores and acquisitions during the year;
  • Good comparable sales growth achieved despite low product inflation;
  • Higher gross margins in Massbuild;
  • High occupancy and depreciation costs in line with the Group’s strategic investment in the future; and
  • Effective comparable cost control.

Net finance costs

Using net interest paid as a proxy, the Group’s average net gearing (or financial leverage) for the 2012 financial year was 38.9% (2011: 39.9%). Taking into account anticipated capital expenditure and excluding any unforeseen developments or new initiatives, the Group will remain net geared for the foreseeable future.


The total tax charge represents an overall tax rate of 33.7% (2011: 38.9%). The current and prior year’s figures are distorted by the effect of the non-deductible portion of the Walmart costs. Adjusting for these reduces the Group tax rate to a more representative 32.5%. The slightly improved tax rate is partly caused by the increased profitability reducing the effect of non-deductible charges. For several years the Group’s tax rate has been higher than the standard South African corporate rate due to the charge from the Secondary Tax on Companies (STC) payable on net dividends. In the current year STC added 4.3% (2011: 5.6%) to the tax rate. The effective tax rate should drop slightly due to the decrease in the proportion of non-deductible expenditure.

Due to the abolishment of STC and reduced effect of non-deductible expenditure, we expect Massmart’s future effective tax rate to be at or near the South African corporate rate of 28%, although higher tax rates in certain foreign jurisdictions may marginally increase this.

Massmart is unconcerned at any specific element of historical tax risk in the Group, but there remains the uncertainty that material adjustments arising from potentially unfavourable tax assessments of previous tax returns, some of which have not yet been assessed by SARS, could impact future tax charges. Extending this uncertainty is that SARS can reopen any tax assessment within three years of issuing such assessment.

Headline earnings

Headline earnings, before Walmart costs, of R1,363.6 million (2011: R1,252.7 million) are 8.9% above the prior year. Including transaction costs however, reduces headline earnings to R1.216.7 million which is 38.0% above the prior year. The more representative figure is 8.9% which better reflects the Group’s actual trading performance in 2012.

Headline earnings per share (HEPS), before Walmart costs, of 632.6 cents, is 2.8% higher than the 2011 HEPS of 615.5 cents. The increase in HEPS is lower than headline earnings due to the increase of 12.2 million shares resulting from the Walmart transaction. Including Walmart costs however, reduces HEPS to 564.5 cents which is 30.3% below the prior year.

After adjusting for the potential future conversion of 4.7 million shares (2011: 11.2 million) shares, the diluted HEPS before Walmart costs is 619.0 cents (2011: 583.5 cents). Under the calculation required by IFRS, the number of potentially dilutive shares was increased due to the significantly higher weighted-average Massmart share price during this financial year.

Statement of financial position

Non-current assets   7,175.8   5,846.7
Current assets   11,895.9   11,427.6
Non-current assets classified as held for sale   103.2  
Total assets   19,174.9   17,274.3
Capital and reserves   4,356.9   3,965.9
Minority interest   207.9   215.8
Total equity   4,564.8   4,181.7
Non-current liabilities   1,486.0   1,205.2
Current liabilities   12,982.2   11,887.4
Non-current liabilities classified as
held for sale
Total equity and liabilities   19,174.9   17,274.3

This review covers the consolidated statement of financial position and the related notes.

Non-current assets

Non-current assets 7,175.8   5,846.7
Property, plant and equipment 3,520.6   2,717.8
Goodwill 2,521.4   2,049.4
Other intangibles 347.1   309.0
Investments 321.9   367.6
Other financial assets 134.6   137.9
Deferred taxation 330.2   265.0

Property, plant and equipment and goodwill together represent 84.2% (2011: 81.5%) of the Group’s total non-current assets.

Massmart continually refurbishes older stores and is building new stores and Distribution Centres, and so during 2012 expenditure of R1,236.8 million (2011: R1,042.4 million) was spent on property, plant and equipment. Of this, R550.1 million (2011: R249.6 million) was replacement capital expenditure, while the balance of R686.7 million (2011: R792.8 million) was invested in new capital assets, including new stores and the new RDC. Acquisitions added a further R106.9 million (2011: R82.2 million) to Group property, plant and equipment.

Goodwill increased by R472.0 million, reflecting the two principal movements of goodwill arising from the acquisition of Fruitspot and the Rhino Cash and Carry Group (R486.4 million) less an impairment of R16.5 million. Under IFRS all goodwill must be tested annually against the value of the business units with which it is associated and, if overstated, that goodwill must be impaired. Other than as noted earlier, no goodwill impairment was necessary this year or in the prior year.

Other intangibles primarily represent computer software that IFRS requires to be disclosed in this category. In terms of IFRS the depreciation charge arising from this asset category is classified as an amortisation charge.

During the 2009 financial year the Group began to implement its strategic plan of investing in the future. This included the opening of a number of RDCs (space increase > 400% in three years); the roll-out of new Makro stores (opened three new stores in 2012); and the roll-out of Food Retail across the Group including Cambridge and Foodco. Capital expenditure as a percentage of sales therefore increased from 1.2% of sales in 2006 to 2.7% at the end of 2012.

Capital expenditure for the next 18 months is budgeted to remain at current levels due to the continued roll-out of Makro stores; the Massdiscounters Foodco conversions and new stores; and the opening of the Massbuild RDC.

Investments and other financial assets

Investments comprise mainly a R177.2 million (2011: R250.0 million) participation in an international treasury, shipping and trading business unit, revalued to reflect the foreign-denominated net assets within that business unit. The R82.0 million (2011: R70.6 million) shown as a bare dominium revaluation represents the Group’s proportionate share of the estimated market value of the right to acquire bare dominiums in certain Makro stores in 2022.

Other financial assets of R134.6 million (2011: R137.9 million) include executive and employee loans of R82.4 million (2011: R92.5 million) owed by participants in the Massmart employee share purchase trust that attract zero percent interest. This loan amount reduces as employees sell their shares and repay the associated loans and increases where executives elect to own Massmart shares, funded with these loans, rather than options issued by the trust. As a result of Walmart acquiring 51% in 2011 of the unvested shares, executives were required to settle the loans associated with those shares – hence the reduction of the amounts due in this category. The finance lease deposit of R37.6 million (2011: R45.3 million) is related to the financing of the Makro Strubens Valley store originally built in 2003.

Deferred tax

The deferred tax asset arises primarily from numerous temporary differences, including tax deductions on trademarks, the operating lease liability arising from the lease-smoothing accounting policy, and unutilised assessed losses. This net asset will reduce over time as the associated tax benefits are utilised.

Current assets

Current assets   11,895.9   11,427.6
Inventories   7,615.6   6,199.7
Trade, other receivables and prepayments   2,953.9   2,562.7
Taxation   21.0   22.5
Cash and bank balances   1,305.4   1,549.1
Restricted cash held on behalf of Massmart Employee Share Trusts’ beneficiaries     1,093.6

Net inventories represent approximately 55.6 days’ sales (on historic sales basis), marginally higher than the prior year’s figure of 52.3 days. The 22.8% increase in stock is largely a result of the additional stores in the Group and an increase in Food inventory as a result of anticipated price increases due to global supply shortages.

In general, Massdiscounters, being a retail discounter with 125 stores, with several stores in Africa with longer supply-chains, has the highest inventory levels and its sales days in inventory are almost double those for Massmart’s wholesale businesses (Makro and Masscash). Builders Warehouse also has higher inventory days than the Group average, given the broader and deeper merchandise range in its stores.

General Merchandise net inventory of R3,221.7 million (2011: R2,694.1 million) represents about 42.3% of total Group inventory, while Food net inventory at R2,434.0 million (2011: R1,862.3 million) is the second largest Group inventory category but with the fastest stock-turns. This inventory category has increased by 30.7% due to the Cambridge expansion. Home Improvement net inventory levels have increased from the new stores in that Division and higher sales growth.

Total trade, other receivables and prepayments, net of provisions, is 15.3% higher than the prior year and is marginally below sales growth. Included here are net trade accounts receivable of R1,545.2 million (2011: R1,273.4 million), which increased by 21.3%. The businesses continue to focus on keeping debtors within their terms. Although trade credit is offered to certain customers in Massbuild and in Masscash, it is well controlled, is insured with a credit risk insurer, and is kept within the Group’s parameters. Allowances for doubtful debts at year-end increased from 4.5% of total trade receivables to 5.1% at June 2012.

For more detail, refer also to the commentary on credit risk in the Financial risks section in note 39.

Non-current liabilities

Non-current liabilities   1,486.0   1,205.2
Non-current liabilities:        
– Interest-bearing   852.7   598.7
– Interest-free   345.8   417.3
Non-current provisions   259.0   167.0
Deferred taxation   28.5   22.2

Major items included in the total of R1,486.0 million (2011: R1,205.2 million) are medium-term bank loans, capitalised finance leases, the operating lease liability arising from the lease-smoothing adjustment, non-current provisions and deferred tax.

The interest-bearing liabilities included in this category are medium-term bank loans and this balance increased during the financial year as a new R750.0 million five-year, fixed rate, amortising loan was raised at 7.9%. Two three-year amortising loans of R500.0 million were each secured during 2010 and 2011, respectively. Interest is fixed on these loans at 9.8% and 8.1%, respectively.

Capitalised finance lease balances are R75.5 million (2011: R58.5 million).

The largest balance in non-current non-interest-bearing liabilities is the total operating lease liability of R342.8 million (2011: R414.3 million) arising from the lease-smoothing accounting policy and which will be released over the remaining period of the Group’s operating leases.

Included in non-current provisions is the long-term provision of R78.2 million (2011: R66.0 million) arising from the actuarial valuation of the Group’s potential liability, unfunded, arising from post-retirement medical aid contributions owed to current and future retirees. With effect from 1999, post-retirement medical aid benefits were no longer offered to new employees joining the Group. The R100.0 million Supplier Development Fund raised as part of the Competition Tribunal’s approval of the Walmart transaction is included here as it is to be spent over three years. Annually, Massmart must report to the Tribunal about our expenditure and achievements under this condition. The Fund has been put on hold until a ruling from the Competition Tribunal is given.

Included in the interest-free amount are liabilities raised on business acquisitions related to the long-term portion of the final cash settlements from the acquisitions of Fruitspot and the Rhino Cash and Carry Group. The acquisitions were effected on 2 January 2012 and 1 March 2012, respectively.

The deferred tax liability arises primarily from prepayments and property, plant and equipment.

Current liabilities

Current liabilities   12,982.2   11,887.4
Trade and other payables   11,302.0   9,381.8
Massmart Employee Share Trusts’ beneficiaries liability     1,093.6
Provisions   139.7   26.8
Taxation   259.0   170.6
Other current liabilities   648.9   409.9
Bank overdrafts   632.6   804.7

Included in the total trade and other payables figure are trade payables of R8,908.8 million (2011: R7,553.9 million) representing approximately 57.1 days of cost of sales (using the historic basis), which is slightly higher than the prior year’s figure of 55.9 days. The figure is representative of the Group’s supplier terms.

As noted earlier, owing to payments to creditors being made shortly after each month-end, the Group trade payables balances at year-end are not representative of the average during the remaining financial period. The amount by which year-end trade payables are overstated in comparison to the average cannot be accurately calculated but is approximately R1.5 billion.



Working capital movements can be volatile. Depending upon creditor payment cycles the extent of the movement tends to be overstated at month- and year-end and so is generally not indicative of the intra-year average.

‘Trading’ represents ‘Operating cash before working capital movements’.

Included in the interest-free amount are liabilities raised on business acquisitions related to the short-term portion of the final cash settlements from the acquisitions of Fruitspot and the Rhino Cash and Carry Group.

The current taxation liability reflects the Group’s liability for provisional corporate tax payments that are generally payable within a few days of the financial year-end.

Major items in other current liabilities include R503.8 million (2011: R286.8 million) being the short-term portion of the medium-term loans noted above.

Cash flow statement

Cash flow from operating activities

Cash flow from operating activities    
Operating cash including cash-effect of Walmart costs   2,614.6    2,264.8 
Working capital movements   53.9    (625.4)
Cash generated from operations   2,668.5    1,639.4 
Interest received   68.8    33.2 
Interest paid   (183.9)   (140.4)
Investment income   0.1    46.8 
Dividends received   3.8    2.1 
Taxation paid   (595.6)   (645.1)
Dividends paid   (838.8)   (822.5)
Net cash inflow from operating activities   1,122.9    113.5 

Operating cash before working capital movements increased by 15.4% to R2,614.6 million (2011: R2,264.8 million). Included in operating cash is the cash effect of the transaction amounting to R122.9 million (2011: R238.7 million). The Group’s working capital management improved significantly and R53.9 million was released from working capital during the year (2011: -R625.4 million).

Total capital expenditure (replacement and expansion) was R1,347.5 million, an increase on the prior year’s total of R1,188.4 million. Capital expenditure for the year is the highest in the history of the Group but is in line with the Group’s strategy of investing for the future. Capital expenditure will remain at similar levels for the next 18 months while the Group continues to roll out new Makro stores and the Massbuild RDC.

Investment in subsidiaries has been described in more detail in the Acquisitions paragraph.

Cash flow from investing and financing activities

Cash flow from investing activities    
Investment to maintain operations   (637.1)   (345.4)
Investment to expand operations   (710.4)   (843.0)
Proceeds on disposal of property, plant and equipment   10.2    25.2 
Proceeds on disposal of assets classified as held for sale   6.5    15.0 
Investment in subsidiaries   (327.9)   (171.0)
Other investing activities   50.7    21.3 
Net cash outflow from investing activities   (1,608.0)   (1,297.9)
Cash flow from financing activities        
Net cash inflow from financing activities   345.9    615.3 
Net decrease in cash and cash equivalents   (139.3)   (569.1)
Foreign exchange movements taken to statement of changes in equity   67.6    2.6 
Cash and cash equivalents at the beginning of the year   744.4    1,310.9 
Cash and cash equivalents at the end of the year   672.8    744.4 

Financial risks

Liquidity risk

Liquidity risk is considered low owing to the Group’s conservative funding structure and its high cash generation. Massmart’s liquidity requirements are continually assessed through the Group’s cash management and treasury function.

The Group has total banking facilities, incorporating overnight, short- and medium-term borrowings, letters of credit and forward exchange contracts of R6,071.7 million (2011: R4,918.9 million). As at June 2012, total interest-bearing debt amounted to R2.1 billion (2011: R1.8 billion).

As the Group begins to build inventory levels for the festive season, net interest-bearing debt will increase up to a maximum of approximately R2.3 billion in October/November, but will reduce rapidly as Christmas trading accelerates with commensurately higher cash proceeds.

Interest risk

Interest rate exposure is actively monitored owing to the Group’s significant intra-month cash movements and the seasonal changes in its net funding profile during the financial year. As noted above, interest rates on the three medium-term bank loans are fixed at 9.8%, 8.1% and 7.9%, respectively. The remaining interest-bearing funding is done through overnight facilities at floating interest rates.

Of the Group’s total financial liabilities of R13.2 billion, 80.3% or R10.6 billion is represented by non-interest-bearing trade and other payables funding.

Credit risk

Credit is available to wholesale customers at Makro, Massbuild and Masscash, and is adequately controlled by using appropriately trained personnel, applying credit granting criteria, continual monitoring and the use of software tools. A portion of the trade debtors’ book in Masscash is insured and a further portion is secured through general notarial bonds, pledges and other forms of security. Similarly, the trade debtors books in Builders Warehouse and Builders Trade Depot are also insured.

Currency risk

Where possible and practical, currency risk in the Group is actively managed. All foreign-denominated trading liabilities are covered by matching forward-exchange contracts. At financial year-end, there were open forward exchange contracts totalling R635.5 million (2011: R446.3 million) of which 98.7% (2011: 99.1%) were US Dollar liabilities.

The sensitivity of the Group to this exposure is shown in note 39 on page 262. In brief, using the US Dollar as a proxy for the Group’s total currency exposure, if the Rand strengthened by 5% from the year-end rate of R8.40/US Dollar, there would be a R6.0 million charge, while a 5% weakening would give rise to a R6.0 million gain (2011 equivalent figures were R3.8 million).

Foreign-denominated assets are not covered by forward exchange contracts, as these are permanent assets held for the long term.

The Group’s exposure to the African currencies has been explained in note 7 and further detail on the sensitivity analysis can be found in note 39 .

Technical review

The appropriate accounting policies, supported by sound and prudent management judgement and estimates, have been consistently applied.

The Group’s accounting policies are governed by IFRS and the AC 500 series as issued by the Accounting Practices Board and guidance has been obtained from effective IFRICs and circulars. Due to the nature and volatility of Exposure Drafts (ED’s), no review has been provided, except for the lease exposure draft specifically discussed above.



The detailed technical review can be found in note 2.

The Group believes that accounting standards set the minimum requirement for financial reporting, and thus more information is provided than required. The financial statements in this Integrated Annual Report have been prepared with the aim of exposing the reader to a very detailed view of the numbers, using a simplified approach, in the hope of facilitating a deeper and informed understanding of the business.

Our efforts have been recognised in the South African Ernst & Young Excellence in Corporate Reporting Awards where Massmart has received an Excellent rating for the past seven years.

Going-concern assertion

The Board has formally considered the going-concern assertion for Massmart and its subsidiaries and believes that it is appropriate for the forthcoming financial year. Click here for more detail.


I would like to acknowledge and pay tribute to the high-quality performances and significant efforts invested by my Finance colleagues and their teams at the Massmart Divisions and the Massmart corporate office. The 2012 financial year was a particularly difficult year for the Group’s Finance teams. Faced with many changes, including the Walmart integration, they delivered superbly on the ongoing demands of their Divisions and the Group.

Ilan Zwarenstein
Financial Director

5 October 2012