Financial review

Statement of comprehensive income

Total Group sales growth for the 26 weeks ended 23 December 2012 was 14.7% with comparable sales growth of 7.3%. Sales in our African businesses represented 7.3% of total sales and increased by 9.5% in Rands and 9.0% in local currencies.

The Group’s product inflation was 3.7% for the period. General Merchandise moved into inflation of 0.8%, while Food and Liquor’s inflation increased to 6.8% and Home Improvement inflation increased to 2.7%.

During the period, six stores were closed, 13 stores opened and four acquired, resulting in a total of 359 stores at December 2012. Net trading space increased by 4.7% to a total of 1,413,573m².

The Group’s gross margin of 18.27% is higher than that of the prior period of 17.70%. This is from improved gross margin performances in Massbuild and Makro and a higher contribution from Game Africa.

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 23.9% increase in occupancy costs. Comparable expenses increased by 11.0%.

Included in operating profit are net realised and unrealised foreign exchange losses of R76.7 million (2011: R82.4 million profit). Whilst the Rand closed stronger than the Group’s African basket of currencies, the gains were overshadowed by the losses of the weaker Malawian Kwacha.

Excluding forex and Walmart costs, earnings before interest, tax, depreciation and amortisation (EBITDA) of R1.8 billion increased over the prior period by 9.6%.

Direct costs incurred in connection with the Walmart integration and acquisition were R205.2 million, comprising R65 million for integration activities and
R140 million being the increase in the Supplier Development Fund required by the judgement of the Competition Appeal Court. The Walmart integration related costs will normalise over the next 12 months to approximately R50.0 million annually.

Net interest paid of R60.4 million increased as a result of the Group’s capital expenditure programme and higher working capital levels. At R1.78 billion, the Group’s average net borrowings are 32.8% higher than the prior period’s figure of R1.34 billion.

The Group’s effective tax rate of 32.1% (2011: 31.2%) 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 is lower due to the prior year sale of Kawena and the acquisition of several store managers’ minority interests in Masscash Wholesale.

Headline earnings decreased by 21.2% and headline EPS decreased by 21.6%. Adjusting for the effect of the forex and Walmart costs in both periods however, shows an increase of 5.8% and 5.3%, respectively.

Statement of financial position

Working capital was managed effectively in Massbuild and Masscash, while Massdiscounters is over-stocked given the lower sales in Game SA and Makro is carrying higher stock levels from its new stores. Days in inventory at December 2012 were 59.9 (2011: 59.0 days) for the Group.

The net book value of property, plant and equipment increased by 19.5% compared to December 2011. This was largely the result of the new stores and the new Massdiscounters’ RDC which opened in July 2012.

The Group’s gearing ratio (debt:equity) increased to 37.7% (2011: 28.8%) due to the funding of the strategic investments and the investment in working capital.

The annual rolling return on equity was 21.9% at December 2012 (2011: 24.4%). Excluding the Walmart costs and forex, this figure was 31.2% (2011: 32.3%).

Statement of cash flows

Operating cash generated of R2.82 billion was 21.3% lower than the prior period, partly reflecting the high level of over-stocked inventory. Total capital expenditure of R735.9 million is 2.2% lower than the prior period, and comprises R333.3 million on replacement and R402.6 million on expansionary expenditure.

Change in financial year-end and reviewed financial information

To align with Walmart, with effect from this reporting cycle Massmart has changed its financial year from end of June to end of December. To assist with future comparisons, reviewed 52-week financial statements are included for the periods ended December 2011 and 2012.

Acquisition of Makro stores

With effect from the end of January 2013, Massmart acquired control of seven Makro stores that had previously been lease-held. The cash consideration paid for control amounted to R575 million. We expect that the income statement effect of this transaction will be neutral in 2013 but then positive with significant annual cashflow benefits.