Financial Review

Statement of comprehensive income

Total Group sales growth for the 26 weeks ended 23 June 2013 was 8.9% with comparable sales growth of 5.5%. Sales in our African businesses represented 7.6% of total sales and increased by 10.7% in Rands and 8.4% in local currencies.

The Group’s product inflation was 2.9% for the period equating to a real comparable volume growth of 2.6%. General Merchandise’s inflation decreased to 0.2%, Food and Liquor’s inflation decreased to 4.4% and Home Improvement inflation increased to 3.1%.

During the period, six stores were closed, one store was sold and seven stores were opened, resulting in a total of 359 stores at June 2013. Net trading space increased by 1.6% to a total of 1,435,625 m².

The Group’s gross margin of 18.73% is lower than that of the prior period of 19.10%. This is a result of a combination of a higher Africa contribution in Massdiscounters and improved performance in Massbuild, offset by the difficult trading conditions in Wholesale Food and a greater Food Contribution at a lower margin.

Total expenses (excluding foreign exchange movements) increased by 7.8%. Employment costs, the Group’s most significant cost, increased by 16.2%. The impact of the Group’s continued investment in capacity and growth can be seen in the 12.2% higher depreciation and amortisation charge and 13.5% increase in occupancy costs. The increase relates to the opening of the new Massdiscounters Regional Distribution Centre, the opening of the Massbuild National Distribution Centre and the opening of the new stores. During the period pre-opening costs amounted to R39.3 million. Comparable expenses increased by 8.8%.

Included in operating profit are net realised and unrealised foreign exchange gains of R133.8 million (June 2012: R154.9 million loss). During the six months, the Rand weakened significantly against the Group’s basket of African currencies. The loss in the prior year related in the most part to the devaluation of the Malawian Kwacha.

Excluding foreign exchange movements, earnings before interest, tax, depreciation and amortisation (EBITDA) of R1.1 billion increased over the prior period by 1.4%.

Net interest paid of R124.3 million increased as a result of the Group’s capital expenditure programme and higher working capital levels. At R3.5 billion, the Group’s average borrowings are higher than the prior period’s figure of R1.9 billion. The higher interest charge is due to the R0.6 billion funding for the acquisition of seven Makro properties discussed below and due to some inefficiencies in working capital.

The Group’s effective tax rate of 31.1% (June 2012: 40.2%) should normalise at 30.0%.

The minority interests comprise store managers’ holdings in Masscash stores and minorities in acquired Masscash businesses. This period’s figure has been affected by the prior year sale of Kawena and the acquisition of several store managers’ minority interests in Masscash Wholesale.

Headline earnings increased by 51.9% and headline EPS increased by 51.2%. Adjusting for the effect of the foreign exchange movements in both periods however, shows a decrease of 9.4% and 9.9% respectively.

Statement of financial position

Working capital was managed effectively in Massbuild and Masscash, while Massdiscounters is overstocked given the lower sales in Game SA and Makro is carrying higher stock levels from its new stores. Days in inventory at June 2013 were 62.4 (June 2012: 57.8 days) for the Group.

The net book value of property, plant and equipment increased by 57.0% compared to June 2012. This was largely the result of the acquisition of seven Makro stores.

The Group’s gearing ratio (debt:equity) increased to 66.0% (June 2012: 47.3%).

The annual rolling return on equity was 26.6% at June 2013 (June 2012: 29.2%). Excluding foreign exchange movements, this figure was 25.7% (June 2012: 30.5%).

Statement of cash flows

Operating cash utilised of R0.6 billion is a reflection of the increased levels of inventory in the Group. Total capital expenditure of R1.2 billion is 35.6% higher than the prior period, and comprises R257.7 million on replacement and R971.5 million on expansionary expenditure. This increase is mainly as a result of the acquisition of seven Makro stores.

Change in Financial Year-end and Reviewed Financial Information

To align with Walmart (the Group’s Holding Company), with effect from the last reporting cycle Massmart has changed its financial year from the end of June to the end of December.

Acquisition of Makro Stores

With effect from the end of January 2013, Massmart acquired control of seven Makro stores. The cash consideration paid for control amounted to R575 million. The income statement effect of this transaction has been neutral to date and we expect it to become positive with significant annual cash flow benefits.