ILAN ZWARENSTEIN
FINANCIAL DIRECTOR

FINANCIAL DIRECTOR’S REVIEWINCLUDING THE AUDITED ABRIDGED ANNUAL FINANCIAL STATEMENTSfor the year ended 23 December 2012

Key issues:

  • Strong total and comparable sales growth
  • Improved trading margin
  • High occupancy costs and depreciation
  • Rand weakness against the African basket offset by the continued Malawian Kwacha devaluation
  • Significant Transaction and Transaction-related costs
  • Increased working capital relating to high stock levels and reduced payable days
  • High capital expenditure levels

Financial impact of Walmart transaction

The Walmart transaction became effective on 20 June 2011 at which time Wal-Mart Stores Inc 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 and in the current period the Competition Appeal Court set down the final ruling of the transaction, which is described in more detail in Management’s Letter to Stakeholders.

During the 26 week December 2012 financial year, the Walmart transaction, integration and related costs amounted to R205.2 million. These costs included the R140.0 million increase in the Supplier Development Fund resulting from the Competition Appeal Court ruling and integration and related costs of R65.2 million relating predominantly to the cost of Walmart expatriates currently operating in the Group and related employment costs. This amount also includes some of the costs associated to the re-instatement of 237 employees or related benefit payments of 79 of the 503 previously retrenched employees. During the prior June 2012 financial 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. 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 (RDC’s), the introduction of Every Day Low Price (EDLP), 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.

The total Supplier Development Fund of R240.0 million represents a non-cash expense for the business in the June 2012 and December 2012 financial years. The Competition Appeal Court ruling requires the funds to be spent within the next five years.

Change in financial year-end and reviewed financial information

To align with Wal-Mart Stores, Inc. (Massmart’s ultimate holding company), Massmart has changed its financial year from end of June to end of December with effect from this reporting cycle. To assist with comparisons of the current financial year of 26 weeks, reviewed 26-week information for December 2011 has been provided where appropriate.

Acquisitions

In the current year, the Group acquired the trading assets of five businesses, all in the Masscash division. The net cash purchase price of R56.9 million gave rise to goodwill of R38.4 million. No contingent payments were provided for any of these acquisitions. These acquisitions increased the Group’s store profile by a net four stores. During the June 2012 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 were dependent on these businesses achieving certain profit hurdles in the two years following the deal. Both businesses are on track to meet these profit hurdles and the business acquisition liabilities are included in the Group’s statement of financial position.

With effect from 25 January 2013, Massmart acquired seven Makro stores that had previously been lease-held. The cash consideration paid for control amounted to R575 million and has been funded by debt. We expect that the income statement effect of this transaction will be neutral in the 2013 financial year but then positive thereafter with significant annual cash flow benefits. Acquisitions are described in more detail in note 3.

Disposals

During the financial year, the Group disposed of a small Mozambican Masscash cash and carry business which was in the process of being sold at the previous financial year-end and classified as held for sale in the statement of financial position. The loss on disposal amounted to R4.4 million and R3.8 million after tax. During the prior year, the Group disposed of the Score stores acquired in 2009. The loss on disposal amounted to R12.1 million and R9.9 million after tax. In the current year, another small Masscash business in South Africa is in the process of being sold. The assets and liabilities have been re-valued 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. Disposals are described in more detail in note 20.

Accounting policies

There were no significant changes in accounting policies during the year. The accounting policies are detailed in note 1.

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:

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 and foreign exchange amounts, to average ordinary shareholders’ equity
Gearing ≈ 35% 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

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.

RETURN ON SALES BEFORE WALMART COSTS AND FOREIGN EXCHANGE (%)


Returns for the 26 weeks ended 23 December 2012 and 25 December 2011 were negatively impacted by the increased depreciation and occupancy costs. These costs comprised approximately 6.4% and 22.8% of total costs and increased by 24.3% and 23.9%, respectively. The increased depreciation and occupancy cost is a consequence of the Group’s significant increase in RDC’s, the roll-out of new stores including two new Makros during the December year and three in the June 2012 year and the introduction and continued roll-out of Food Retail in three Divisions during the periods under review.

Massmart's current ROS is 3.7% (Dec 2011: 4.1%) for the 26-week period.

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).

RETURN ON AVERAGE SHAREHOLDERS' EQUITY BEFORE WALMART COSTS AND FOREIGN EXCHANGE (%)


The decline in the Group’s profitability (measured by ROS) during the economic recession in 2009 coupled with the Group’s strategic significant investment in Food Retail and Supply Chain were the main causes of the decline in the Group’s return on shareholders’ equity. The Group’s on-going investment in new stores and new businesses increased the size of the net asset value. As the Group’s profitability improves, and as the new stores, RDC’s and business begin to trade optimally, the ROE will improve to higher levels. During the periods under review, 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 and foreign exchange) is 31.2% (Dec 2011: 32.3%) for the 26-week period.

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 net 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)

Massmart prefers some gearing, of approximately 35%, in order to leverage the return on shareholders’ equity but without introducing excessive financial risk to the Group. 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 R8.1 billion (June 2012: R6.5 billion)).

From 2008, the Group decided rather to own than lease certain of its larger stand-alone, key strategic store formats, specifically Makro and Builders Warehouse stores, and this will add incrementally to the Group’s gearing. This change does not represent a major financial shift however 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. Massmart acquired control of seven Makro stores that had previously been lease-held with effect from 25 January 2013. This transaction has been covered in the Acquisitions paragraph above. As regards to financing any future 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 RDC’s. This has the effect of pushing the gearing levels up in the short term.

  Dec 2012   Dec 2011   June 2012
Gearing 38.0%   31.6%   38.9%
Average interest-bearing debt for the period (Rm) 1,784.3   1,343.6   1,618.8
Average capital and reserves (Rm) 4,698.9   4,257.8   4,161.4


Average interest-bearing debt is calculated by grossing up the net interest paid of R60.4 million (Dec 2011: R48.1 million/June  2012: R115.1 million) by the average interest rate of 6.77% (Dec 2011: 7.16%/June 2012: 7.11%)

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 38.0% (Dec 2011: 31.6%) for the 26-week period.

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. 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 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. There were no STC credits available for use as part of this declaration. The number of shares in issue at the date of declaration was 216,910,195.

Despite the lower headline earnings per share, the Group maintained the absolute value of the final cash dividend in the prior year, adjusted for the change in the Dividend Tax legislation. Notice was given that a gross final cash dividend of 275.00 cents per share in respect of the period ended 23 December 2012 was declared. The dividend was declared out of income reserves and will be subject to the Dividend Tax rate of 15% which will result in a net dividend of 233.75 cents per share to those shareholders who are not exempt from paying Dividend Tax. Massmart’s tax reference number is 9900/196/71/9.

The salient dates relating to the payment of the dividend were as follows:
   
Last day to trade cum dividend on the JSE: Thursday, 14 March 2013
First trading day ex dividend on the JSE: Friday, 15 March 2013
Record date: Friday, 22 March 2013
Payment date: Monday, 25 March 2013

Share certificates may not be dematerialised or rematerialised between Friday, 15 March 2013 and Friday, 22 March 2013, both days inclusive.

Massmart shareholders who hold Massmart ordinary shares in certificated form (certificated shareholders) should note that dividends will be paid by cheque and by means of an electronic funds transfer (EFT) method. Where the dividend payable to a particular certificated shareholder is less than R100, the dividend will be paid by EFT only to such certificated shareholder. Certificated shareholders who do not have access to any EFT facilities are advised to contact the Company’s transfer secretaries, Computershare Investor Services at Ground Floor, 70 Marshall Street, Johannesburg 2001, PO Box 61051 Marshalltown 2107 (011) 370 5000, 086 110 09818, in order to make the necessary arrangements to take delivery of the proceeds of their dividend.

Massmart shareholders who hold Massmart ordinary shares in dematerialised form will have their accounts held at their CSDP or broker credited electronically with the proceeds of their dividend.

The dividend cover 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:

  Dec 2012   June 2012   Dec 2011   June 2011   June 2010   June 2009   June 2008   June 2007   June 2006   June 2005   June 2004
Actual dividend cover x1.18   x1.41   x1.65   x1.07   x1.50   x1.56   x1.70   x1.70   x2.00   x2.00   x2.00
Dividend cover before Walmart costs (taxed) x1.44   x1.59   x1.48   x1.59                            

More detail on the Group dividend is provided in note 10.

Income statement for the year ended 23 December 2012

  December 2012
26 weeks
Rm
  December 2011
26 weeks
Rm
(Reviewed)
  June 2012
52 weeks
Rm
Revenue  36,234.5    31,547.1   61,362.9 
Sales  36,122.6    31,492.2   61,209.1 
Cost of sales  (29,523.2)   (25,917.3)   (49,957.1)
Gross profit  6,599.4    5,574.9   11,252.0 
Other income  111.9    54.9   153.8 
Depreciation and amortisation  (342.6)   (275.6)   (594.2)
Impairment of assets  (5.4)   (0.3)   (16.5)
Employment costs  (2,487.5)   (2,137.1)   (4,336.1)
Occupancy costs  (1,225.6)   (989.0)   (2,059.9)
Foreign exchange loss  (76.7)   82.4   (72.5)
Other operating costs  (1,243.2)   (902.2)   (2,192.0)
Operating profit before Walmart costs  1,330.3    1,408.0   2,134.6 
Walmart transaction, integration and related costs  (205.2)   (41.7)   (185.4)
Operating profit  1,125.1    1,366.3   1,949.2 
Finance costs  (106.0)   (72.5)   (183.9)
Finance income  45.6    24.4   68.8 
Net finance costs  (60.4)   (48.1)   (115.1)
Profit before taxation  1,064.7    1,318.2   1,834.1 
Taxation  (342.3)   (410.9)   (618.2)
Profit for the year    722.4    907.3   1,215.9 
Profit attributable to:          
Owners of the parent  691.8    893.0   1,173.5 
Preference shareholders  1.4    2.5   6.1 
Non-controlling interests  29.2    11.8   36.3 
Profit for the year    722.4    907.3   1,215.9 
Earnings per share (cents)         
Basic EPS  319.7    414.9   544.4 
Diluted basic EPS  315.4    406.3   532.7 

Sales

STORE PROGRESS
OPENING BALANCE JULY 2012
   
GAME STORES OPENEDGROBLERSDAL (MPUMALANGA)
KING WILLIAM’S TOWN (EASTERN CAPE)
LEPHELALE (LIMPOPO)
LICHTENBURG (NORTH WEST)
MASERU (LESOTHO)
QUEENSTOWN (EASTERN CAPE)
STELLENBOSCH (WESTERN CAPE)
   
   
DIONWIRED STORE OPENED
RUSTENBURG (NORTH WEST)
   
   
MAKRO STORES OPENED
BLOEMFONTEIN (FREE STATE)
CAPE TOWN (WESTERN CAPE)
   
   
BUILDERS EXPRESS STORE OPENED
MIDDELBURG (MPUMALANGA)
   
   
MASSCASH WHOLESALE STORES
ACQUIRED
KIMBERLEY (NORTHERN CAPE)
SUPERBLOEM (FREE STATE)
UPINGTON (NORTHERN CAPE)
MASSCASH WHOLESALE STORE
CONVERTED

RAHME GUYS (GAUTENG)
MASSCASH WHOLESALE STORES CLOSED
BARA RANK, DIEPKLOOF (GAUTENG)
BLOEMFONTEIN CASH AND CARRY (FREE STATE)
KIMBERLEY CASH AND CARRY (NORTHERN CAPE)
LIQUORLAND EXPRESS, DIEPKLOOF (GAUTENG)
JUMBO STORE CLOSED
JUMBO BLOEMFONTEIN (FREE STATE)
   
   
CAMBRIDGE FOOD STORES OPENED
EAST LONDON (EASTERN CAPE)
MDANTSAME (EASTERN CAPE) 
CAMBRIDGE FOOD STORE ACQUIRED
TEMBA (GAUTENG)    
CAMBRIDGE FOOD STORE CLOSED
NEWTOWN (GAUTENG)    
CAMBRIDGE FOOD STORE CONVERTED 
RAHME GUYS (GAUTENG)            
   
   
TOTAL STORES
DECEMBER 2012
   
   

Total Group sales for the December 2012 financial year amounted to R36.2 billion. Total and comparable store sales for the year increased by 14.7% and 7.3%, respectively, over the comparative period. Comparable sales are sales figures quoted for stores that have traded in excess of 12 months. The Group’s average product selling price inflation rate for the year was 3.7% (Dec 2011: 1.1%), equating to a real comparable sales growth of 3.6%. Inflation/deflation for each of the Group’s major product categories is shown in the table below:

General Merchandise inflation measured 0.8%, positive for the first time in almost five years. Some inflation in this category will be positive for the business as the Group will need to move less boxes in order to achieve the same level of sales, thereby incurring lower costs.

Looking ahead to December 2013, inflation is expected to increase in General Merchandise due to a combination of the weaker Rand and product inflation out of the East. Food inflation is likely to continue although there are some signs that it may have peaked. Some commodities, such as rice, are actually in deflation. If the Rand remains stable, product inflation should be between 4% and 6%.

During the December 2012 financial year, the Group opened 13 stores, closed six stores, and acquired four stores, resulting in a total of 359 stores. Net trading space increased by 4.7% to a total of 1,413,573m2. New space has not been proportionately adjusted if the store was not open for part of the financial year. The detailed store movement is explained in the table alongside.

Gross profit

The Group’s gross margin of 18.27% is above the comparative period’s 17.70%. The increase is a result of improved trading in Massbuild and Makro and a higher contribution from Game Africa. These increases were partially 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 on-going revenue from sales of cellular products and airtime.

Other income of R111.9 million (Dec 2011: R54.9 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, income from insurance premium contributions and income from extended warranty insurance. Other income is described in more detail in note 4.

Expenses

  December 2012
26 weeks
Rm
(Audited)
  December 2011
26 weeks
Rm
(Reviewed)
  % change   June 2012
52 weeks
Rm
(Audited)
Depreciation and amortisation (342.6)   (275.6)   24.3   (594.2)
Impairment of assets (5.4)   (0.3)       (16.5)
Employment costs (2,487.5)   (2,137.1)   16.4   (4,336.1)
Occupancy costs (1,225.6)   (989.0)   23.9   (2,059.9)
Other operating costs (1,243.2)   (902.2)   37.8   (2,192.0)
Total expenses (5,304.3)   (4,304.2)   23.2   (9,198.7)
Operating expenses as % of sales (14.7)   (13.7)       (15.0)


Due to the new stores, specifically the Makro stores, the investment in the Retail Food supply chain and infrastructure, and IT upgrades across most Divisions, total expenses (excluding foreign exchange movements and Walmart costs) increased by 23.2%. The impact of the Group’s continued investment in capacity and growth can be seen in the 24.3% higher depreciation and amortisation charge and the 23.9% increase in occupancy costs. Comparable expenses increased by 11.0%.

Total expenses (excluding foreign exchange movements and Walmart costs) represent 14.7% of sales, an increase compared to the comparative period’s 13.7%. 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 46.9% of total expenses, are 16.4% higher than the comparative period. As a percentage of sales, employment costs increased marginally to 6.89% (Dec 2011: 6.79%). On a comparable basis, these costs increased by only 8.1%. Included in employment costs are IFRS 2 Share-based Payments charges of R68.5 million (Dec 2011: R41.3 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. On 1 October 2012, the final conversion of ‘A’ preference shares to ordinary shares through the Thuthukani Trust occurred. The employees had the option of converting their remaining share allocation into Massmart ordinary shares and continue to receive 100% of the dividend on their ordinary shares or they could sell their remaining share allocation and receive net proceeds after tax and selling expenses. The related share-based payment reserve was released to retained income and this entry had no impact on the income statement. Going forwards, the Group will not account for any share-based payment expenses relating to the Thuthukani BEE Staff Scheme. The Group employed 7.2% more employees (on a full-time equivalent basis or FTE and excluding acquisition FTE’s) compared to December 2011 and 11.1% more employees compared to June 2012, increasing as we opened new stores and from acquisitions. FTE’s in December periods will be considerably higher than June due to the impact of the festive season.

For the forthcoming year, the Group’s salary increases are expected to be 5.0% and 7.0% and wage increases, most of which have already been agreed, are in a range of 7.0% and 8.2%.

Occupancy costs, the Group’s second biggest operating cost at 23.1% of total expenses, increased by 23.9%. On a comparable basis, these costs increased by 16.7%.

Property lease costs comprise 60.1% 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 comparative period of 3.1%. The Massdiscounters RDC’s, the opening of new stores, including two new Makro stores, and the continued 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 Group roll-out of RDC’s, this trend is likely to continue over the next 12 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 fixed lease escalations no longer increase the Group’s lease charge. Adjusting for the non-cash lease-smoothing adjustment in both December periods shows that annual cash occupancy costs increased by 24.8% while total trading space increased by 7.0% and DC space increased by 18.1% for this same period.

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 RDC’s, the depreciation and amortisation charge increased by 24.3% which is well ahead of sales growth, and will continue to increase ahead of sales growth, for the next 12 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 76.5% 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 37.8%, comparable costs increased by 11.9% and continue to receive intense management focus.

The impairment of assets in the December 2012 year relates to the impairment of leasehold improvements in Masscash of R5.4 million. The impairment of assets in the December 2011 comparative six-month period relates to the closure of the Game Mauritius store of R0.3 million. The impairment of assets in the June 2012 year relates to the impairment of certain acquired goodwill in Masscash of R16.5 million. More information relating to impairment of assets can be found in note 5.

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 R76.7 million (Dec 2011: net gain of R82.4 million).

Foreign exchange movement relating to: December 2012
26 weeks
Rm
(Audited)
  December 2011
26 weeks
Rm
(Reviewed)
  June 2012
52 weeks
Rm
(Audited)
   
   
Arising from loans to African operations (82.8)   19.3   (124.7)
Arising from hedges (0.7)   19.3   5.9
Arising from an investment in a trading and logistics structure 1.0   44.4   48.2
Arising from the translation of foreign creditors 5.8   (0.5)   (1.9)
  (76.7)   82.5   (72.5)


During the December 2012 financial year, the translation of the Group loans in the African balance sheets amounted to an R82.8 million foreign exchange loss in the income statement (Dec 2011: R19.3 million gain/June 2012: R124.7 million loss). There was a net translation gain from other foreign monetary balances of R6.1 million (Dec 2011: R63.2 million loss/June 2012: R52.2 million gain). 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. The Malawian Kwacha has continued to devalue, and at December 2012, the currency had lost a further 20.3% against the Rand in the current period. During January and February 2013, the Group successfully managed to repatriate almost all of its foreign currency cash from Malawi. At the time of writing, the Group’s in-country foreign cash equivalents amounted to R16.0 million. This loss in both June 2012 and December 2012 was offset by the Rand weakness compared to the Group’s African currencies basket. Should the Rand continue to weaken against these currencies, it is likely that the Group will report foreign exchange gains. The foreign exchange loss is described in more detail in note 7.

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 December 2012 amounted to R49.6 million (Dec 2011: R61.2 million) which included the new Makro stores.

Trading and operating profit

Reconciliation between Trading and Operating profit before tax December2012
26 weeks
Rm
(Audited)
  December2011
26 weeks
Rm
(Reviewed)
  %
change
  June 2012
52 weeks
Rm
(Audited)
     
Trading profit before taxation 1,498.5 1,424.7 5.2 2,456.8
Corporate net interest (131.8) (137.1) (306.6)
Asset impairments (5.4) (0.3) (16.5)
Walmart transaction, integration and related costs (205.2) (41.7) (185.4)
Loss on disposal of business (4.4) (12.1)
Fair value adjustment on assets classified as held for sale (0.4) (7.9)
BEE transaction IFRS 2 charge (9.9) (9.8) (21.7)
Foreign exchange loss (76.7) 82.4 (72.5)
Operating profit before taxation 1,064.7 1,318.2 (19.2) 1,834.1
Trading profit as % of sales 4.1% 4.5%       4.0%
Operating profit as % of sales 2.9%   4.2%       3.0%


Group trading profit, which is shown before accounting for the Walmart costs and foreign exchange, grew by 5.2% on the comparative period which is significantly below sales growth of 14.7%. The Group’s lower net margin growth is a result of expense pressure due to investing in new stores and RDC’s, the roll-out of Food Retail throughout the Group and the additional costs resulting from the need to move additional volumes due to the low inflation in General Merchandise. Expressed as a percentage of sales, Group trading profit deteriorated from 4.5% to 4.1%.

Group operating profit before Walmart costs, which includes the foreign currency translation movements, was 5.5% down on the comparative December 2011 period. After excluding foreign exchange, operating profit of R1,407.0 million was up 6.1% on the comparative period. Considering the Group’s strategic investment in the future, EBITDA and EBITDAR for December 2012 are up 9.6% and 15.1% respectively, on the December 2011 comparative period.

EBITDA and EBITDAR December 2012
26 weeks
Rm
(Audited)
  December 2011
26 weeks
Rm
(Reviewed)
  % change   June 2012
52 weeks
Rm
(Audited)
     
     
     
Operating profit before Walmart costs
and foreign exchange
1,407.0   1,325.6   6.1   2,207.1
Depreciation and amortisation 342.6   275.6   24.3   594.2
Impairment of assets 5.4   0.3       16.5
EBITDA 1,755.0   1,601.5   9.6   2,817.8
Occupancy costs 1,225.6   989.0   23.9   2,059.9
EBITDAR 2,980.6   2,590.5   15.1   4,877.7


The Group’s December 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 December 2011 year or June 2012 financial year annualising;
  • Good comparable sales growth achieved despite low product inflation;
  • Higher Group gross margins from improved gross margins in Massbuild and Makro and a higher contribution from Game Africa;
  • High occupancy and depreciation costs in line with the Group’s strategic investment in the future; and
  • Increased non-cash contribution to the Supplier Development Fund.

Net finance cost

Using net interest paid as a proxy, the Group’s average net gearing (or financial leverage) for the December 2012 financial year was 38.0% (Dec 2011: 31.6%/June 2012: 38.9%). Taking into account anticipated capital expenditure and excluding any unforeseen developments or new initiatives, the Group will remain net geared for the foreseeable future.

Taxation

Tax rate reconciliation December 2012
26 weeks
(Audited)
  December 2011
26 weeks
(Reviewed)
  June 2012
52 weeks
(Audited)
South African corporate taxation 28.0%   28.0%   28.0%
Secondary Tax on Companies 0.1%   1.9%   4.3%
IFRS 2 1.0%   0.9%   1.0%
Other 3.0%   0.4%   0.4%
Overall tax rate 32.1%   31.2%   33.7%
TOTAL TAX CHARGE (Rm) 342.3   410.9   618.2


The total tax charge represents an overall tax rate of 32.1% (Dec 2011: 31.2%/June 2012: 33.7%). 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. Due to the abolishment of STC in the current year, there is a very small STC impact in December 2012. STC added 1.9% to the December 2011 tax rate and 4.3% to the June 2012 tax rate. Due to the reduced effect of non-deductible expenditure, we expect Massmart’s future effective tax rate to be approximately 30%, 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. More information relating to taxation can be found in note 9.

Statement of comprehensive incomefor the year ended 23 December 2012

      December 2012
26 weeks
Rm
(Audited)
    June 2012
52 weeks
Rm
(Audited)
Profit for the year  722.4    1,215.9 
Items that will not be re-classified subsequently to the income statement  –    – 
Items that will be re-classified subsequently to the income statement       
Foreign currency translation reserve  25.1    67.6 
Revaluation of listed shares  1.6    0.2 
Cash flow hedges  (5.8)   11.3 
Less income tax relating to the cash flow hedges  1.6    (3.2)
Other comprehensive income for the year, net of tax  22.5    75.9 
Total comprehensive income for the period  744.9    1,291.8 
Total comprehensive income attributable to:       
Owners of the parent  714.3    1,249.4 
Preference shareholders  1.4    6.1 
Non-controlling interests  29.2    36.3 
Total comprehensive income for the period  744.9    1,291.8 


The Group accounts for three movements in other comprehensive income; the movement of the foreign currency translation reserve, the revaluation of listed shares and the net movement of cash flow hedges. All of these may be re-classified subsequently to the income statement.

Headline earnings

Headline earnings, before Walmart costs and foreign exchange, of R916.5 million (Dec 2011: R865.9 million/June 2012: R1,415.8 million) are 5.8% above the December 2011 comparative period. Including Walmart costs and foreign exchange however, reduces headline earnings to R705.5 million which is 21.2% down on the December 2011 comparative period. The more representative figure is 5.8% which better reflects the Group’s actual trading performance in December 2012.

December2012
26 weeks
Rm
(Audited)
December2011
26 weeks
Rm
(Reviewed)
% change June 2012
52 weeks
Rm
(Audited)
Headline earnings
Reconciliation of net profit for the period to headline earnings
Net profit attributable to owners of the parent 691.8 893.0 (22.5) 1,173.5
Impairment of assets 5.4 0.3 16.5
Loss on disposal of fixed assets 6.2 2.4 12.6
Loss on disposal of business 4.4 12.1
Fair value adjustment on assets classified as held for sale 0.4 7.9
Total tax effects of adjustments (2.7) (0.5)   (5.9)
Headline earnings 705.5 895.2 (21.2) 1,216.7
Headline earnings before Walmart costs and foreign exchange (taxed) 916.5 865.9 5.8 1,415.8
Headline EPS (cents) 326.0 416.0 (21.6) 564.5
Headline EPS before Walmart costs and foreign exchange (taxed) (cents) 423.5 402.3 5.3 656.9
Diluted headline EPS (cents) 321.7 407.3 (21.0) 552.3
Diluted headline EPS before Walmart costs and foreign exchange (taxed) (cents) 417.9 394.0 6.1 642.7


Headline earnings per share (HEPS), before Walmart costs and foreign exchange, of 423.5 cents, is 5.3% higher than the December 2011 comparative period HEPS of 402.3 cents. Including Walmart costs and foreign exchange however, reduces HEPS to 326.0 cents which is 21.6% below the December 2011 comparative period.

After adjusting for the potential future conversion of 2.9 million shares (Dec 2011: 4.6 million/June 2012: 4.7 million shares), the diluted HEPS before Walmart costs and foreign exchange is 417.9 cents (Dec 2011: 394.0 cents/June 2012: 642.7 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. Headline earnings is described in more detail in note 11.

Statement of financial positionas at 23 December 2012

  December 2012
Rm
(Audited)
  December 2011
Rm
(Audited)
  June 2012
Rm
(Audited)

Assets 

         
Non-current assets  7,595.1    6,291.6   7,175.8 
Property, plant and equipment  3,868.2    3,236.1   3,520.6 
Goodwill  2,557.7    2,052.5   2,521.4 
Other intangibles  387.6    296.4   347.1 
Investments  258.8    329.3   321.9 
Other financial assets  126.5    128.8   134.6 
Deferred taxation  396.3    248.5   330.2 
Current assets  15,422.2    14,972.3   11,895.9 
Inventories  9,691.5    8,385.2   7,615.6 
Trade, other receivables and prepayments  3,681.7    3,522.5   2,953.9 
Taxation  17.0    54.4   21.0 
Cash and bank balances  2,032.0    3,010.2   1,305.4 
Non-current assets classified as held for sale  2.5      103.2 
Total assets  23,019.8    21,263.9   19,174.9 

Equity and liabilities 

       
Equity attributable to equity holders of the parent  4,739.7    4,658.1   4,356.9 
Share capital  2.2    2.2   2.2 
Share premium  752.1    750.1   750.6 
Other reserves  323.3    583.1   614.7 
Retained profit  3,662.1    3,322.7   2,989.4 
Non-controlling interests  175.6    206.5   207.9 
Total equity  4,915.3    4,864.6   4,564.8 
Non-current liabilities  1,183.4    928.9   1,486.0 
Non-current liabilities:           
- Interest-bearing  671.8    376.8   852.7 
- Interest-free  305.7    357.5   345.8 
Non-current provisions and other  169.2    170.2   259.0 
Deferred taxation  36.7    24.4   28.5 
Current liabilities  16,921.1    15,470.4   12,982.2 
Trade and other payables  15,305.5    14,541.0   11,302.0 
Current provisions and other  363.8    13.7   139.7 
Taxation  298.5    235.7   259.0 
Other current liabilities  561.2    520.0   648.9 
Bank overdrafts  392.1    160.0   632.6 
Liabilities associated to assets classified as held for sale      141.9 
Total equity and liabilities  23,019.8    21,263.9   19,174.9 

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

Non-current assets

  December 2012
Rm
(Audited)
  December 2011
Rm
(Audited)
  June 2012
Rm
(Audited)
Non-current assets  7,595.1    6,291.6   7,175.8 
Property, plant and equipment  3,868.2    3,236.1   3,520.6 
Goodwill  2,557.7    2,052.5   2,521.4 
Other intangibles  387.6    296.4   347.1 
Investments  258.8    329.3   321.9 
Other financial assets  126.5    128.8   134.6 
Deferred taxation  396.3    248.5   330.2 


Tangible and intangible assets

Property, plant and equipment and goodwill together represent 84.6% (Dec 2011: 84.1%/June 2012: 84.2%) of the Group’s total non-current assets.

Massmart continually refurbishes older stores and is building new stores and Distribution Centres, and so during December 2012 expenditure of R666.8 million (Dec 2011: R740.6 million/June 2012: R1,236.8 million) was spent on property, plant and equipment. Of this, R279.8 million (Dec 2011: R318.8 million/June 2012: R550.1 million) was replacement capital expenditure, while the balance of R387.1 million (Dec 2011: R421.8 million/June 2012: R686.7 million) was invested in new capital assets, including new stores and the new RDC. Acquisitions added a further R7.7 million (Dec 2011: R0.0 million/June 2012: R106.9 million) to Group property, plant and equipment.

TANGIBLE AND INTANGIBLE ASSETS CAPITAL EXPENDITURE (RM), ACQUISITIONS (RM) AND TOTAL CASH FLOW
AS A % OF SALES
December periods are 26 weeks and June periods are 52 weeks.


In December 2012, goodwill increased by R36.3 million in most part due to the acquisition of the trading assets in five entities in Masscash for R38.4 million. No impairment was required in this period. 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. For the six months to December 2011, goodwill increased by R3.1 million. In the June financial year, 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 in Masscash.

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 RDC’s (space increase > 400% in three years); the roll-out of new Makro stores (opened three new stores in June 2012 and a further two new stores in December 2012); and the roll-out of Food Retail across the Group including Cambridge and Foodco. Masscash Retail now operates out of 44 stores while Foodco can be found in 27 stores (including five in Africa). Capital expenditure as a percentage of sales therefore increased from 1.2% of sales in 2006 to 2.1% in December 2012.

Capital expenditure for the next 12 months is budgeted to be slightly higher due to the continued roll-out of Makro stores; the Massdiscounters’ Foodco conversions and new stores; the opening of the Massbuild RDC; and the Group’s acquisition of seven of its Makro properties. More information relating to property, plant and equipment, goodwill and intangible assets can be found in notes 12, 13 and 14 respectively.

CAPITAL EXPENDITURE, ACQUISITIONS AND BUYBACKS (RM)
December periods are 26 weeks and June periods are 52 weeks.


Investments and other financial assets

Investments comprise a R104.0 million (Dec 2011: R207.3 million/June 2012: R177.2 million) participation in an international treasury, shipping and trading business unit, revalued to reflect the foreign-denominated net assets within that business unit. The R110.0 million (Dec 2011: R76.1 million/June 2012: R82.0 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 seven Makro stores in 2022. With effect from 25 January 2013, Massmart acquired control of these Makro stores. More information relating to investments can be found in note 15.

Other financial assets of R126.5 million (Dec 2011: R128.8 million/June 2012: R134.6 million) include executive and employee loans of R70.6 million (Dec 2011: R86.3 million/June 2012: R82.4 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. The finance lease deposit of R33.0 million (Dec 2011: R41.8 million/June 2012: R37.6 million) is related to the financing of the Makro Strubens Valley store originally built in 2003. More information relating to other financial assets can be found in note 16.

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. More information relating to deferred tax can be found in note 17.

Current assets

  December 2012
Rm
(Audited)
  December 2011
Rm
(Audited)
  June 2012
Rm
(Audited)
Current assets 15,422.2   14,972.3   11,895.9
Inventories 9,691.5   8,385.2   7,615.6
Trade, other receivables and prepayments 3,681.7   3,522.5   2,953.9
Taxation 17.0   54.4   21.0
Cash and bank balances 2,032.0   3,010.2   1,305.4
           


Net inventories represent approximately 59.9 days’ sales (on historic sales basis), marginally higher than the December 2011 comparative figure of 59.0 days (June 2012: 55.6 days). The 15.6% increase in stock on December 2011 is largely a result of the additional stores in the Group, an increase in Food inventory as a result of anticipated price increases due to global supply shortages and the over-stocked position in Massdiscounters given the slower comparable store sales in Game SA. In the graph below, the green bars illustrate December balances which will be considerably higher than June due to the impact of the festive season:

December periods are 26 weeks and June periods are 52 weeks.


In general, Massdiscounters, being a retail discounter with 133 stores, including 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.

Net inventory days December 2012
Group 59.9
Massdiscounters 99.7
Masswarehouse 53.6
Massbuild 73.7
Masscash 38.8


Inventory by category net of provisions: December 2012
Rm
(Audited)
  December 2011
Rm
(Reviewed)
  June 2012
Rm
(Audited)
Food 3,068.0   2,559.6   2,434.0
Liquor 762.6   564.8   519.6
General Merchandise 4,250.7   3,773.3   3,221.7
Home improvement 1,610.2   1,487.5   1,440.3
  9,691.5   8,385.2   7,615.6


General Merchandise net inventory of R4,250.7 million (Dec 2011: R3,773.3 million/June 2012: R3,221.7 million) represents about 43.9% of total Group inventory, while Food net inventory at R3,068.0 million (Dec 2011: R2,559.6 million/June 2012: R2,434.0 million) is the second largest Group inventory category but with the fastest stock-turns. This inventory category has increased by 19.9% on December 2011 due to the continued roll-out of Food Retail within the Group. Home Improvement net inventory levels have increased on December 2011 from the one new store in that Division and higher sales growth. More information relating to inventories can be found in note 18.

Total trade, other receivables and prepayments, net of provisions, is 4.5% higher than December 2011 and is below sales growth. Included here are net trade accounts receivable of R1,692.9 million (Dec 2011: R1,632.9 million/June 2012:
R1,545.2 million), which increased by 3.7%. The businesses continue to focus on keeping debtors within their terms. Although trade credit is offered to certain customers in Makro, 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 was 4.7% of total trade receivables (Dec 2011: 4.2%/June 2012: 5.1%). Trade, other receivables and prepayments are described in more
detail in note 19.

Non-current liabilities

  December 2012
Rm
(Audited)
  December 2011
Rm
(Reviewed)
  June 2012
Rm
(Audited)
   
Non-current liabilities 1,183.4   928.9   1,486.0
Non-current liabilities:          
– Interest-bearing 671.8   376.8   852.7
– Interest-free 305.7   357.5   345.8
Non-current provisions and other 169.2   170.2   259.0
Deferred taxation 36.7   24.4   28.5
           

Major items included in the total of R1,183.4 million (Dec 2011: R928.9 million/June 2012: R1,486.0 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. This balance increased substantially during the June 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 R55.2 million (2011: R62.9 million/ June 2012: R75.5 million). The largest balance in non-current non-interest-bearing liabilities is the net operating lease liability of R302.7 million (Dec 2011: R354.5 million/June 2012: R342.8 million) arising from the lease-smoothing accounting policy and which will be released over the remaining period of the Group’s operating leases. More information relating to non-current liabilities can be found in note 23.

Included in non-current provisions and other is the long-term provision of R81.5 million (Dec 2011: R69.2 million/June 2012: R78.2 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 was included here in the June financial year. It was raised in the June 2011 financial year. This provision has now been recognised as a current provision and more information has been provided in that section. Also included in non-current provisions 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 in the June financial year. More information relating to non-current provisions can be found in note 24.

The deferred tax liability arises primarily from prepayments and property, plant and equipment. More information relating to deferred tax can be found in note 17.

Current liabilities

December 2012
Rm
(Audited)
December 2011
Rm
(Reviewed)
June 2012
Rm
(Audited)
Current liabilities 16,921.1 15,470.4 12,982.2
Trade and other payables 15,305.5 14,541.0 11,302.0
Current provisions and other 363.8 13.7 139.7
Taxation 298.5 235.7 259.0
Other current liabilities 561.2 160.0 648.9
Bank overdrafts 392.1 520.0 632.6
       


Included in the total trade and other payables figure are trade payables of R12,601.3 million (Dec 2011: R12,281.1 million/June 2012: R8,908.8 million) representing approximately 68.3 days of cost of sales (using the historic basis), which is lower than the December 2011 comparative figure of 75.9 days (June 2012: 57.1 days). The figure is representative of the Group’s supplier terms. The decline in trade payable days is largely a result of the shift in mix from General Merchandise to Food. We continue to monitor this ratio very closely. 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 R2.3 billion. More information relating to trade and other payables can be found in note 25.

Included in current provisions and other are liabilities raised on business acquisitions related to the short-term portion of the final cash settlements from the acquisitions of the Rhino Cash and Carry Group. In the current period, the Supplier Development Fund was reclassified from non-current provisions to current provisions. The Fund was also increased from R100 million to R240 million resulting from the Competition Appeal Court final ruling described at the start of this report. Annually, Massmart must report to the Tribunal about our expenditure and achievements under this condition. More information relating to current provisions can be found in note 26.

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 R414.7 million (Dec 2011: R387.4 million/June 2012: R503.8 million) being the short-term portion of the medium-term loans noted above. More information relating to other current liabilities can be found in note 27.

Contingent liabilities

There are no current or pending legal or arbitration proceedings, of which the Group is aware, which would have a material effect on the Group's financial position.

Commitments

Commitments in respect of capital expenditure approved by directors:

December 2012
Rm
(Audited)
June 2012
Rm
(Audited)
Contracted for 954.8 472.1
Not contracted for 715.5 598.3
1,670.3 1,070.4


More information relating to these capital expenditure commitments can be found in note 30. Massmart has the right of first refusal on the sale of any shares by the minority shareholders in various Masscash stores. Historically Massmart has exercised this right. The amount to be paid in future, should Massmart exercise its rights, totals R370.5 million (June 2012: R259.9 million). Capital commitments will be funded using current facilities.

The Group is exposed to the following operating lease commitments:

  December 2012
Rm
(Audited)
  June 2012
Rm
(Audited)
 
Land and buildings      
Year 1 1,430.8   1,329.8
Years 2 to 5 5,537.4   5,104.2
Subsequent to year 5 6,379.9   5,799.3
  13,348.1   12,233.3
Plant and equipment      
Year 1 4.9   5.5
Years 2 to 5 7.9   7.4
  12.8   12.9
Other      
Year 1 10.2   9.8
Years 2 to 5 12.3   15.0
Subsequent to year 5  
  22.5   24.8
  13,383.4   12,271.0


Promissory notes that represent commitments under non-cancellable operating leases of R208.9 million (June 2012: R303.9 million) entered into by Masstores (Pty) Ltd on behalf of certain Makro stores are included in operating lease commitments in land and buildings. These leases terminate in December 2020 and have a discounted present value of R193.6 million (June 2012: R262.8 million), discounted at 10.5% (June 2012: 15%). In accordance with IAS 17 Leases, the rentals paid are amortised over the entire remaining lease period on a straight-line basis.

Statement of changes in equityfor the year ended 23 December 2012

  Share capital
Rm
  Share premium
Rm
  Other reserves
Rm
  Retained profit
Rm
  Equity
attributable
 to equity
 holders of
the parent
Rm
  Non-
controlling
interests
Rm
  Total
Rm
Balance as at June 2011 (audited)  2.0    743.9    444.4    2,775.6    3,965.9    215.8    4,181.7 
Total comprehensive income  –    –    75.9    1,179.6    1,255.5    36.3    1,291.8 
Profit for the period  –    –    –      1,179.6    1,179.6    36.3    1,215.9 
Other comprehensive income for the period  –    –    75.9    –    75.9    –    75.9 
Dividends declared (note 10 –    –    –    (838.8)   (838.8)     (838.8)
Net changes in non-controlling interests  –    –      –      (5.3)   (5.3)
Distribution to non-controlling interests  –    –    –    –    –    (38.9)   (38.9)
Cost of acquiring non-controlling interests  –    –    (20.5)   –    (20.5)   –    (20.5)
Share-based payment expense  –    –    113.8    –    113.8    –    113.8 
Share trust net consideration  –    –    –    (127.0)   (127.0)   –    (127.0)
Issue of share capital (net of costs) 0.2    –    –    –    0.2    –    0.2 
Treasury shares    6.7    1.1    –    7.8    –    7.8 
Balance as at June 2012  2.2    750.6    614.7    2,989.4    4,356.9    207.9    4,564.8 
Total comprehensive income  –    –    22.5    693.2    715.7    29.2    744.9 
Profit for the period  –    –    –    693.2    693.2    29.2    722.4 
Other comprehensive income for the period  –    –    22.5    –    22.5    –    22.5 
Dividends declared (note 10) –    –    –    (317.0)   (317.0)   –    (317.0)
Net changes in non-controlling interests  –    –    –    –    –    (21.9)   (21.9)
Distribution to non-controlling interests  –    –    –    –    –    (39.6)   (39.6)
Cost of acquiring non-controlling interests  –    –    (13.6)   –    (13.6)   –    (13.6)
Share-based payment expense  –    –    68.5    –    68.5    –    68.5 
Share trust net consideration  –    –    –    (72.6)   (72.6)   –    (72.6)
Release of share-based payment reserve  –    –    (292.6)   292.6    –    –    – 
Release of amortisation of trademark reserve –    –    (76.5)    76.5    –    –    – 
Treasury shares  –    1.5    0.3    –    1.8    –    1.8 
Balance as at December 2012  2.2    752.1    323.3    3,662.1    4,739.7    175.6    4,915.3 

  • The non-controlling interests comprise mainly store managers' holdings in certain Masscash stores.
  • Net changes in non-controlling interests represents the acquisition of non-controlling interests by the Group.
  • Distribution to non-controlling interests comprise dividends paid to non-controlling shareholders of a Group company.
  • Cost of acquiring non-controlling interests comprise the costs paid for increasing the Group's interest in a Group company above the company's non-controlling interest balance in the statement of financial position.
  • The share trust net consideration is the cost of buying shares in the market above the exercise price to meet the demands of the Massmart share schemes.

Major items in other reserves include the share-based payments reserve of R579.2 million (Dec 2011: R730.9 million/ June 2012: R803.3 million), the foreign currency translation reserve of R57.3 million (Dec 2011: R51.3 million/ June 2012 R32.2 million) and the cost of acquiring minority interests of a debit of R306.1 million (Dec 2011: R276.8 million/June 2012: R292.5 million). The cost of acquiring non-controlling interests comprise the costs paid for increasing the Group's interest in a Group company above the Company's non-controlling interest balance in the statement of financial position. This was previously recognised in goodwill, and even though recognised in other reserves, the balance will always be a debit balance. On 1 October 2012, the Thuthukani Trust came to an end. The employees had the option of converting their remaining share allocation into Massmart ordinary shares and continue to receive 100% of the dividend on their ordinary shares or they could sell their remaining share allocation and receive net proceeds after tax and selling expenses. The relevant share-based payment reserve was released to retained income. More information relating to other reserves can be found in note 22.

Statement of cash flowsfor the year ended 23 December 2012

  December 2012
26 weeks
Rm
(Audited)
  December 2011
26 weeks
Rm
(Reviewed)
June 2012
52 weeks
Rm
(Audited)

Cash flow from operating activities 

       
Operating cash before working capital movements  1,707.5    1,640.3 2,614.6 
Working capital movements  1,110.0    1,939.4 53.9 
Cash generated from operations  2,817.5    3,579.7 2,668.5 
Interest received  45.6    24.4 68.8 
Interest paid  (106.0)   (72.5) (183.9)
Investment income    3.8 0.1 
Dividends received    3.8 
Taxation paid  (369.1)   (363.2) (595.6)
Dividends paid  (317.0)   (291.1) (838.8)
Net cash inflow from operating activities  2,071.0    2,881.1 1,122.9 

Cash flow from investing activities 

       
Investment to maintain operations  (347.6)   (334.6) (637.1)
Investment to expand operations  (402.6)   (427.9) (710.4)
Proceeds on disposal of property, plant and equipment  8.6    4.5 10.2 
Proceeds on disposal of assets classified as held for sale  5.7    5.8 6.5 
Investment in subsidiaries  (56.9)   (1.2) (327.9)
Disposal of subsidiaries  (50.7)  
Other investing activities  82.3    48.9 50.7 
Net cash outflow from investing activities  (761.2)   (704.5) (1,608.0)

Cash flow from financing activities 

       
(Decrease)/increase in non-current liabilities  (159.8)   (224.1) 239.4 
(Decrease)/increase in current liabilities  (108.1)   123.7 233.5 
Non-controlling interests acquired  (27.3)  
Net acquisition of treasury shares  (72.6)   (57.1) (127.0)
Net cash (outflow)/inflow from financing activities  (367.8)   (157.5) 345.9 
Net increase/(decrease) in cash and cash equivalents  942.0    2,019.1 (139.2)
Foreign exchange movements  25.1    86.7 67.6 
Cash and cash equivalents at the beginning of the period  672.8    744.4 744.4 
Cash and cash equivalents at the end of the period 1,639.9    2,850.2 672.8 


Operating cash performance remained resilient and increased by 4.1% to R1,707.5 million (December 2011: R1,640.3 million). This is a great reflection of the quality of earnings of the Group. Cash released from working capital however, decreased to R1,110.0 million (December 2011: R1,939.4 million). The decrease is a combination of lower trade payable days due to the Group’s increased Food mix contribution and due to the over-stock position in Massdiscounters as a result of the slower comparable store sales in Game SA. Included in operating cash is the cash effect of the Walmart costs amounting to R36.6 million (Dec 2011: R41.7 million/June 2012: R122.9 million).

Total capital expenditure (replacement and expansion) was R750.2 million, a slight decrease on the comparative period of R762.5 million (June 2012: R1,347.5 million). Capital expenditure for all three periods reviewed 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 continue at these high levels for the next 12 months while the Group continues to roll-out new Makro stores, the Massbuild RDC and to acquire key properties.

Investment in subsidiaries has been covered in the Acquisitions paragraph above. More information relating to the statement of cash flow can be found in note 37.

Financial risks

These are described very briefly below, however, more information relating to the Group’s financial risk management and related sensitivity analysis can be found in financial instruments note 38.

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 R5,428.6 million (June 2012: R6,071.7 million). As at December 2012, total interest-bearing debt amounted to R1.7 billion (June 2012: R2.1 billion).

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 R16.7 billion, 87.8% or R14.7 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 R713.1 million (June 2012: R635.5 million) of which 98.6% (June 2012: 98.7%) were US Dollar liabilities. The sensitivity of the Group to this exposure is shown in note 38. In brief, using the US Dollar as a proxy for the Group’s total currency exposure, if the Rand strengthened by 5% from the 26-week year-end rate of R8.59/US Dollar (June 2012: R8.40/US Dollar), there would be a R3.9 million charge to total comprehensive income, while a 5% weakening would give rise to a R3.9 million gain
(52 week June 2012 equivalent figures were R6.0 million). Foreign-denominated assets are not covered by forward exchange contracts, as these are permanent assets held for the long term. The Walmart creditor, whilst current in nature, has not been covered. 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 38.

Segmental review

Business segments

The Group is organised into four Divisions for operational and management purposes, being Massdiscounters, Masswarehouse, Massbuild and Masscash. Massmart reports its business segment information on this basis. The principal offering for each Division is as follows:

  • Massdiscounters – general merchandise discounter and food retailer.
  • Masswarehouse – warehouse club.
  • Massbuild – home improvement retailer and building materials supplier.
  • Masscash – food wholesaler, retailer and buying association.
  • The corporate column includes certain consolidation entries.
  • All inter-company transactions have been eliminated in the above results.
  • Trading profit before taxation is earnings before corporate net interest, asset impairments, BEE transaction IFRS 2 charges, foreign exchange movements, loss on disposal of business, assets classified as held for sale and Walmart-related costs.
  • Net capital expenditure is defined as capital expenditure less disposal proceeds.

Business segments

for the 26 week year ended 23 December 2012

  Total
Rm
  Corporate Rm   Mass- discounters
Rm
  Mass- Rm   Massbuild
Rm
  Masscash
Rm
         
Sales 36,122.6     8,422.1   9,630.2   4,663.1   13,407.2
Operating profit before interest and taxation 1,125.1   (214.9)   352.5   516.4   269.1   202.0
Trading profit before interest and taxation 1,427.1     426.5   518.1   271.0   211.5
Net finance (costs)/income (60.4)   (131.8)   23.1   17.0   21.6   9.7
Operating profit before taxation 1,064.7   (346.7)   375.6   533.4   290.7   211.7
Trading profit before taxation 1,498.5     449.6   535.1   292.6   221.2
Inventory 9,691.5   31.2   3,406.2   2,376.9   1,321.6   2,555.6
Total assets 23,019.8   (3,462.5)   7,667.1   6,136.0   4,594.9   8,084.3
Total liabilities 18,104.5   (7,176.7)   7,492.7   6,299.1   4,236.5   7,252.9
Net capital expenditure 741.6   22.4   261.8   265.9   73.8   117.7
Depreciation and amortisation 342.6   9.4   128.1   62.0   61.6   81.5
Impairment losses 5.4           5.4
Non-cash items other than depreciation and impairment 234.4   190.9   34.5   22.6   12.1   (25.7)
Cash flow from operating activities 2,071.0   1,545.9   37.2   100.9   102.4   284.6
Cash flow from investing activities (761.2)   54.9   (261.6)   (253.2)   (73.7)   (227.6)
Cash flow from financing activities (367.8)   (1,087.6)   388.0   249.1   (11.8)   94.5
Inventory days 59.9     99.7   53.6   73.7   38.8
Number of stores 359     133   18   85   123
Trading area (m2) 1,413,573     441,382   179,202   395,871   397,118
Trading area (m2) increase on
December 2011
7.0%     6.9%   14.8%   0.5%   11.2%
Trading area (m2) increase on
June 2012 (before re-easurements)
4.7%     5.8%   17.0%   0.5%   3.3%
Average trading area per store (m2) 3,938     3,319   9,956   4,657   3,229
Distribution centre space (m2) 290,704     178,488   51,300   29,624   31,292
Distribution centre space (m2))
increase on December 2011
18.1%     5.6%   95.1%     46.4%
Distribution centre space (m2)
increase on June 2012
11.1%     5.6%   32.2%     29.3%
Number of full-time equivalents 36,053   314   13,767   3,854   8,083   10,035
Number of full-time equivalents
increase on December 2011
7.2%   (0.3%)   12.2%   21.8%   (4.3%)   6.2%
Number of full-time equivalents
increase on June 2012
11.1%   0.3%   38.1%   9.5%   9.4%   (10.8%)


Business segments

for the 52 week year ended June 2012

  Total
Rm
  Corporate Rm   Mass- discounters
Rm
  Mass- warehouse
Rm
  Massbuild
Rm
  Masscash
Rm
         
Sales 61,209.1     14,805.7   15,370.6   8,138.0   22,894.8
Operating profit before interest and taxation 1,949.2   (205.4)   656.2   848.4   397.2   252.9
Trading profit before interest and taxation 2,265.3     749.8   844.5   389.8   281.2
Net finance (costs)/income (115.1)   (306.6)   63.2   61.8   45.5   21.0
Operating profit before taxation 1,834.1   (512.0)   719.4   910.2   442.7   273.9
Trading profit before taxation 2,456.8     813.0   906.3   435.3   302.2
Inventory 7,615.6   8.6   2,661.2   1,793.2   1,198.3   1,954.3
Total assets 19,174.9   (2,763.5)   5,912.0   4,838.7   4,298.5   6,889.2
Total liabilities 14,610.1   (6,237.5)   5,775.7   5,032.5   4,131.3   5,908.1
Net capital expenditure 1,337.3   (106.6)   505.9   318.9   304.9   314.2
Depreciation and amortisation 594.2   16.1   213.2   110.2   119.7   135.0
Impairment losses 16.5           16.5
Non-cash items other than depreciation and impairment 54.7   (34.7)   51.9   22.5   18.3   (3.3)
Cash flow from operating activities 1,122.9   385.7   (136.1)   76.5   209.9   586.9
Cash flow from investing activities (1,608.0)   187.1   (505.9)   (455.8)   (304.9)   (528.5)
Cash flow from financing activities 345.9   (1,070.1)   607.7   245.5   332.9   229.9
Inventory days 55.6     89.0   51.0   75.0   34.0
Number of stores 348     125   16   84   123
Trading area (m2) 1,350,300     415,186   146,026   406,987   382,101
Trading area (m2) increase on June 2011 5.4%     7.1%   13.7%   (1.5%)   8.6%
Average trading area per store (m2) 3,880     3,321   9,127   4,845   3,107
Distribution centre space (m2) 261,579     168,953   38,800   29,624   24,202
Distribution centre
space (m2)increase on June 2011
11.2%       210.4%     13.2%
Number of full-time equivalents 32,439   313   9,972   3,519   7,390   11,245
Number of full-time equivalents increase on June 2011 17.0%   5.4%   18.1%   22.3%   8.1%   21.2%


Geographic segments

The Group's four Divisions operate in two principal geographical areas – South Africa and the rest of Africa.

Geographic segments
for the 26 week year ended December 2012

  Total
Rm
  South Africa
Rm
  Rest of Africa
Rm
   
Sales 36,122.6   33,503.5   2,619.1
Segment assets 16,716.7   16,215.8   500.9
Net capital expenditure 741.6   700.6   41.0

  • All inter-company transactions have been eliminated in the above results.
  • Segment assets excludes financial instruments and deferred taxation and reflects the geographic location of the Group's physical assets.
  • Net capital expenditure is defined as capital expenditure less disposal proceeds.

More information relating to segmental reporting can be found in note 39.

Related-party transactions

Related-party transactions comprise:

  • Transactions between the Company and its subsidiaries, which have been eliminated on consolidation and are thus not disclosed.
  • Compensation of key-management personnel.
  • Transactions between the Company and Wal-Mart Stores, Inc (its holding company). Walmart transaction, integration and related costs comprise professional fees, integration costs, expatriate employment costs, share-based payment, travel, consulting costs and other directors expenses relating to the Walmart transaction, of which certain amounts remain unpaid at the reporting date, as well as the additional R140 million being the increase in the Supplier Development Fund required by the judgement of the Competition Appeal Court. As a 51% shareholder, Wal-Mart Stores, Inc also received a dividend of R166 million based on their number of shares held.
  • The Group holds cash reserves on behalf of the Group's Chairman, Lamberti Education Foundation Trust.
  • Loans to directors.
  • The post-retirement medical aid liability, Massmart Pension Fund and Massmart Provident Fund are managed for the benfit of past and current employees of the Group.

More information on related-party transactions can be found in note 33.

Directors’ emoluments

A detailed review can be found in notes 34 and 35.

Technical review

The appropriate accounting policies, supported by sound and prudent management judgement and estimates, have been consistently applied, except for IAS 1: Presentation of Financial Statements, which amended the presentation of items within the Statement of Comprehensive Income. No restatement was required in the Group financial statements for this change.

The accounting policies and methods of computation applied in the preparation of the abridged annual financial statements are consistent with those applied in the preparation of the Group’s annual financial statements for the 26 weeks ended 23 December 2012.

The Group financial statements have been prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, the Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, the JSE Listings Requirements and the requirements of the Companies Act of South Africa.

A technical review has been provided in note 2

Independent auditors

To align with Wal-Mart Stores, Inc. (Massmart’s ultimate holding company), Massmart has changed its external auditors to Ernst & Young with effect from this reporting cycle.

Critical judgements in applying the Group's accounting policies

In the process of applying the Group's accounting policies, management has not made any critical judgements that have a significant effect on the amounts recognised in the financial statements. Management applies judgement in classifying a lease as financing or operating at its inception.

Key sources of estimation uncertainty

The following areas highlight where estimation has been used in the Group financial results:

  • Property, plant and equipment useful lives and residual values;
  • Goodwill impairment calculation;
  • Inventory provisions;
  • Allowance for doubtful debts;
  • Fair value of options granted;
  • Provision for post-retirement medical aid; and
  • Deferred tax assets – estimation of future taxable profit.

More detail on estimation uncertainty is provided in note 41.

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. The going concern assertion can be found in the Directors’ report.

Subsequent events

With effect from the end of January 2013, Massmart acquired seven Makro stores that had previously been lease-held. The cash consideration paid for control amounted to R575 million.

Appreciation

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 December 2012 financial year was a particularly difficult year for the Group’s Finance teams as they faced a change of year-end, change of auditors and progressed well with the Walmart integration. They delivered superbly on the on-going demands of their Divisions and the Group.

Ilan Zwarenstein

Financial Director

8 April 2013