1. Financial Performance FY2018 Report
Publication dated:
April 2019
Next publication:
September 2019
Financial Performance FY2018 Report

2. Started and ended at 10.25% (10% for six months)
Trading Context for the Financial Period | FY2018
The 12 months to December 2018 saw retailers facing continued tough market conditions that have become the new normal for South African retailers. GDP growth +0.8% with the economy in a technical recession for the first half of Consumer confidence recovered in unprecedented form as the country’s leadership changed (CCI: 15.5) with the next survey showing a decline, as expected.
Growth in total retail trade sales showed some recovery at an average growth of +2.1% but has slowed over the last few months. Retail sales in food and beverages declined -1.6%.  Rand volatility saw the currency fluctuate in response to domestic and international changes. Inflation consistently within the target has contributed to the Reserve Bank decision to drop the repo rate causing the interest rate to decline to 10% from 10.25% at the beginning of the year but ended where it started as a pre- emptive from the SARB.
In line with these conditions Massmart presented a difficult set of full-year results, complicated by a mix of factors. Massbuild and Masswarehouse were the star performers as a result of good sales and margin management. Massdiscounters saw pleasing volume growth in the second half of the year but not enough to offset deflation in general merchandise and a distracting head office move that affected business more than anticipated. Africa did reasonably well, stores showed pleasing growth in contrast to their competition.
Economic Indicators for Massmart Holdings FY2018 period (January to December 2018)
GDP Growth
0.8%
CPI
4.6%
Fuel Price
Increased +6% since Jan 2018
CPI Food and Non-Alc Bev
3.6%
R/$ Exchange Rate
17% weaker since Jan 2018
RMB/BER Consumer Confidence Index (CCI)
15.5
Interest Rate
Started and ended at 10.25% (10% for six months)
Average Growth in Retail Trade Sales
2.1%
% of Household Debt as % of disposable income
ave 71.9%
Average Growth in Food and Beverage Retail Sales
-1.6%
SOURCE: Ti Economic Indicators Report, StatsSA
NOTE:2017 figures have been restated to a like-for-like basis to remove the IFRS 15 impact whereby turnover generated as an agent on behalf of a third are no longer included in the reporting of revenue. So the turnover from Shield Buying Group has been excluded from both 2018 and the comparable 2017 period to allow for meaningful assessment

3. Massmart Group Performance
Analysis of the Group’s financial results was complicated by a mix of factors unique to Massmart’s business
1. The Group underwent a restructure and relocation of Massdiscounters and Masscash causing some disruption and once-off restructuring costs
2. Accounting changes with new IFRS coming into effect, such as Shield’s sales being excluded
3. 52-week trading year versus 53 weeks in the prior period as such adjusted growths have been included
Metric
FY weeks
FY2018
Turnover Performance
Turnover
Comparable turnover
+2.7% to R93.7bn
-0.8%
-3.0% to R90.9bn (52:52 = +2.9%)
+1.2% (Adj 52:52)
Profitability Performance
Gross profit
Gross profit margin
Trading profit2
Trading profit margin2
Operating profit
Operating profit margin
+1.9% to R17.65bn
18.8% (19.63% 52:52)
+4.2% to R2.74bn
2.93% (2.66% 52:52)
+8.9% to R2.73bn
2.91% (2.81% 52:52)
+0.2% to R17.7bn (52:52 = +2.0%)
19.45%
-24.6% to R2.1bn (52:52 = -16.8%)
2.28%
-30.7% to R1.89bn (52:52 = -23.9%)
2.08%
Operational Performance
Internal Inflation
Inventory Level
HEPS
2.0%
-2.0% to R11bn
+13.6% to cents
0.2%
+10.9% to R12.2bn
-39.5% to cents
“There were some very real issues in the market that affected us … there were some very real issues inside the business that we could have handled better. But undoubtedly it was a very difficult year”
- Guy Hayward, Massmart Group CEO
SOURCE: Massmart Holdings
NOTE: onwards figures have been restated to remove the IFRS 15 impact whereby turnover generated as an agent on behalf of a third are no longer included in the reporting of revenue. (i.e. excluding Shield). 2 Trading profit excludes restructure costs

4. Massmart Group Performance (cont.)
Group turnover growth +2.9% to R90.9bn in FY2018 (FY2017 Adj: R88.4bn – adjusted to exclude Shield sales and remove the extra week).
52:53 week growth -3.0% with softer sales in November and December (comp -0.9%) a trend seen across SA
Comparable turnover growth +1.2% (Adj: -4.7%), suggested comparable volume growth +1.4%
Online sales growth +56% for FY2018 at 1.1% sales participation from those categories that are online
‘Black Friday’ was considered a success with R1.8bn sales over three days and +16% sales growth, reporting customers cutting back on purchases before the promotion and shopping the deals
Food and liquor turnover growth reported at +3.3%. Food +0.7% and Liquor +11.8%
Durables turnover +0.7% with strong market share reported despite the soft demand
Continuing strong market share in numerous categories, including large appliances with over 39% market share1, small appliances, Hi-tech and most DIY and hardware categories
Home improvements turnover +5.9% as retail participation increased in Massbuild division
Private Label participation at 9.0% in total, Food participation declined to 5.6% (FY2017: 5.9%), participation increased for GM to 13.9% (FY2017: 13.8%) and home improvements to 19.7% (FY2017: %)
Value-Added Services +61% growth to R250m in gross revenue, RCS and bill payments – focus on a competitive range
The DCs from Massdiscounters and Makro were transitioned into a new business unit under Massmart Logistics to be used as a Group asset thereby improving DC cost recoveries and increasing transport efficiencies
R125m in saving reported from Group-wide logistics efficiencies
SOURCE: Massmart Holdings
NOTE: GFK SA Dec 2018

5. Massmart Group Performance (cont.)
Massmart South Africa
Massmart SA sales growth at +2.9% for FY2018 to R83bn, accounting for 91.3% of Group sales
Comparable sales +1.5%
Food and liquor turnover contributes 56% to SA sales with +3.2% sales growth
Durables make up the other 44% of sales, with reported growth +4.4%
Massmart Non-SA
Trading in 12 Non-SA countries across 47 stores
Turnover growth +3.7% in rands to R7.9bn, accounting for 8.7% of Group sales
Non-SA accounts for 19% of Massdiscounters sales, 11% of Masscash and 8% of Massbuild sales
Average sales in a Non-SA store is reportedly three times higher than those of many other SA competitors
Trading space +5.8% growth
In constant currency1 turnover growth +3.9% (comp +0.5%)
Rand sales improved in H2 due to positive currency movements
Food and liquor turnover contributes 51% to Non-SA sales with growth +4.9%
The balance of 49% of the sales is from durables, which increased +2.4%
NOTE: All growth are adjusted to 52:52 weeks and IFRS. Constant currency excludes the effect of foreign currency fluctuations
SOURCE: Massmart Holdings

6. Massmart Divisional Performance
Massdiscounters
Turnover R19.7bn in FY2018, adjusted growth -1.2% with market shares reported as constant or increasing and 22.6% of sales from Food and liquor
Comparable turnover growth -1.5%
Good ‘Black Friday’ sales in Game +24.0% and +R600m over threes days but December unexpectedly slowed
Product deflation of -2.9%. Adjusting for deflation, durable volume growth +3.7%
Game SA sales -0.1%, comparable +0.1% with positive volume growth in H2 while Non-SA sales -0.9% in rands (+1.5% on constant currencies) with tough trading in Nigeria and Mozambique
New Game layout rolled out to 12 stores focusing on improved trading density (+17%) and shelf-space sales density (+8.5%)
Dion Wired faced limited product innovation and severe stock shortages leading to declining sales
Head office relocated to JHB – announced in Feb 2018 and moved in Aug 18 causing disruption and impacting profit, with costs of R116m and an anticipated R30m annual saving
Masswarehouse
Turnover R28.8bn, adjusted growth +5.4%, good considering the environment
New Riversands store at 90% of budget despite road access issues
Comparable growth of +3.7%, boosted by durables and liquor comp growth, GM +4.5%, food and liquor comp +3.3%
Good ‘Black Friday’ sales with +10% growth but December slowed
Internal product deflation of +0.2% with general merchandise and food deflation (food sales were impacted)
Makro’s online turnover growth +22.4% with better margins due to product mix and better fulfilment and logistics. 54% of sales is from Retail Food and 3.5% is from GM (FY2018 growth +19.0%). 33% of sales is from ‘Click ‘n Collect’
SOURCE: Massmart Holdings

7. Massmart Divisional Performance (cont.)
Massbuild
Turnover at R13.8bn, with adjusted growth +5.9% with reported gains in market share
Comparable growth +3.4%
Growth in contractor sales is beginning to slow in SA, H2 retail sales participation higher
‘Black Friday’ sales +33%, appliances, especially aircons performed well
With internal inflation at 2.7%
Non-SA’s turnover growth +14.1% boosted by new stores as comp growth was slightly negative, +12.1% in constant currencies
Online sales growth over 100% contributing to around 1% of sales with more items added and ‘Click ‘n Collect’ rolling out
Masscash
Trading in a competitive wholesale and retail food environment, turnover R28.7bn, with adjusted growth +2.1%
Comparable growth at -0.2%
Wholesale +2.3% benefitting from less deflation
Retail (Cambridge and Rhino) sales +1.8%, in-line with the market
Internal inflation +0.3% as deflation eased for commodities
Jumbo and Cambridge HO merged and relocated to JHB from Jun 2018 at a cost of R44.9m, with an anticipated annual saving of R22m per year, some trading benefits of this restructure are reported to have begun to show in H2
Non-SA +6.3%, +4.2% in constant currencies
The division hopes to see their competitiveness improve in the future as tax compliance and enforcement could level the playing field
SOURCE: Massmart Holdings

8. Turnover Growth (52:52 weeks adjusted) Internal Price Inflation
Massmart Divisional Turnover
Divisional Growth (%) Analysis – FY2018
Turnover Growth
Turnover Growth (52:52 weeks adjusted)
Comp Growth
Internal Price Inflation
Massmart Group
-3.0%
2.9%
1.2%
0.2%
Massdiscounters
-1.2%
-1.5%
-2.9%
Masswarehouse
3.7%
5.4%
-0.2%
Massbuild
4.3%
5.9%
3.4%
2.7%
Masscash
-11.7%
2.1%
0.3%
SOURCE: Massmart Holdings

9. Group Profitability Gross Profit
Gross profit increased +0.2% to R17.7bn in FY2018, adjusted for the extra week in FY2017, growth +2.0%, with a slight decline in gross profit margin from 19.63% to 19.45% for the year
Attributed to:
Margin pressure in Game
Stock adjustments in Massfresh
Offset, in part, by the higher retail participation in Massbuild
SOURCE: Massmart Holdings

10. Group Profitability (cont.)
Operating Expenses
Expenses increased +5.0% in FY2018, this is excluding restructuring costs. With divisions reporting good expense management. Comparable expenses increasing +2.3%, below inflation
Massdiscounters +1.6% (comp +0.6%)
Masswarehouse +9.2% (comp +5.7%) due to the new store opened at the end of 2017
Massbuild +8.1% (comp +3.6%) with six net new stores
Masscash limited to only +0.6%
Massdiscounters and Masswarehouse DCs were moved under the Massmart Logistics business unit to improve costs and transport efficiency
Operating Expenses Analysis – FY2018
Expense Growth
Comp Growth
Attributed to:
Total
5.0%
2.3%
Employment costs
2.7%
0.0%
Better scheduling in stores and the DCs
Full-time employees +1.0% to 48,500
Depreciation
3.2%
-1.1%
IT equipment and software – GK POS
Lower CAPEX spend
Changes due to IFRS
Occupancy costs1
10.1%
6.3%
Trading space +2.2% and Makro Riversands rental annualised
Rates increased
Other operating expenses
5.8%
4.6%
Leveraging Group synergies and containing costs
increased admin efficiency from lower support service costs
Also including R58m on non-capital IT upgrade costs and store opening expenses
SOURCE: Massmart Holdings
NOTE: IFRS 16 came into effect 1/1/19 means that going forward, fro FY19, operating lease cost will be replaced by amortisation of the right-of-use asset and calculated lease finance costs on the interest line

11. Trading Profit Growth Adj 52:52
Group Profitability (cont.)
Divisional Trading Profit
Group trading profit declined -16.8% to R2.1bn in FY2018 , excluding restructure costs and adjusted for the 53rd week in FY2017 and Group trading profit margin declined to 2.27%
In H2 Masswarehouse had a massive negative adjustment to inventory and cost of sales in Massfresh and more than 20 staff replaced
Divisional Trading Profit – excluding restructure costs – FY2018
Trading Profit (R’m)
Trading Profit Growth Adj 52:52
Trading Margin FY2017
Adj 52 weeks
Trading Margin FY2018
Attributed to:
Massmart Group
R 2 069
-16.8%
2.65%
2.27%
Solid expense management could not offset the weak sales in Nov and Dec
Massdiscounters
R 32.6
-91.3%
1.84%
0.2%
Expect to recover 1% in trading margin post-restructure
Non-SA under pressure, especially Nigeria
Masswarehouse R
-12.4%
4.53%
3.8%
Margin management reported as good in a tough environment
Massfresh had an inventory adjustment
Massbuild
R 749.1
1.8%
5.58%
5.4%
Non-SA margin improved with new stores
Higher participation from retail
Masscash
R 188.6
48.4%
0.39%
0.7%
Margin improved in H2
Less deflation in wholesale
SOURCE: Massmart Holdings

12. Group Profitability (cont.)
Operating Profit
Operating profit before interest declined -30.7% in FY2018 to R1.9bn
Operating profit margin at 2.1% (FY2017: 2.8% adjusted)
Included in the operating profit is a foreign exchange loss of –R2.7m (FY2017: -R47.2m) Also included is the restructure costs of R161m – the Group anticipates an annual saving of R52m as a result of the restructure
SOURCE: Massmart Holdings

13. Operational Overview CAPEX CAPEX declined -11.6% in FY2018 to R1.6bn
40% of FY2018 CAPEX was used for IT as massive IT infrastructure changes are implemented
New store related CAPEX has declined in-line with the Group’s strategy to curtail new store growth and focus on reducing working capital levels
CAPEX (R’m) and CAPEX % Change YoY
FY2014
FY2015
FY2016
FY2017
FY2018
CAPEX
R 2,194
R 1,710
R1,781
R 1 817
R 1 606
CAPEX % Change
6.6%
-22.0%
5.1%
2.0%
-11.6%
CAPEX as a % of Turnover
2.8%
1.9%
1.8%
SOURCE: Massmart Holdings

14. Operational Overview (cont.)
Internal Product Inflation
Group internal product inflation for F2018 was reported at +0.2%, at HY2018: -0.7%. This was below the CPI average for the period of 4.6%
Durables -2.1% and Home improvement +0.9%
Food and liquor product inflation +1.1% (food deflation -1.1% and Liquor +2.2%) having a negative impact on food sales growth, especially in wholesale
Inflation
FY2014
FY2015
FY2016
FY2017
FY2018
CPI Average for Period
6.1%
4.6%
6.3%
5.3%
CPI Food1
4.8%
5.1%
10.5%
7.0%
3.6%
Group Internal Inflation
-1.3%
2.0%
0.2%
Massdiscounters
3.1%
1.7%
-3.3%
-2.5%
-2.9%
Masswarehouse
5.5%
3.4%
1.1%
2.3%
-0.2%
Massbuild
5.9%
3.8%
-3.0%
3.7%
2.7%
Masscash
2.9%
-1.4%
3.9%
0.3%
Inventory Levels
Inventory levels increased +10.9% to R12.2bn
Inventory days at 61 days (FY2017: 56 days)
Increase in net trading space +2.2%
Lower than anticipated December sales for Game and Builders leaving the divisions heavier than planned
Strategic buy-ins, especially impactful for Masscash who have been strategically increasing stock levels to improve service- levels
SOURCE: Massmart Holdings, Ti Economic Indicators report, StatsSA
NOTE: 1 Including non-alcoholic beverages, this is an average over 12 months

15. In Summary Massmart produced a complicated set of results to unpack
The positives:
Turnover growth +2.9% in tough conditions (with the adjustments for the extra week last year)
Market share gains across a number of Durable Goods categories and most DIY and hardware categories
Gross profit growth positive
New Game layout is rolling out with improved trading densities
Expenses well controlled with the consolidation of DCs reducing expenses
Online continues to report good growth
The team relocation is already showing trading gains
Value-added service improvements are adding to income
The negatives:
Non-SA sales impacted by currency weakness
Profit affected by relocation costs and disruptions with operating profit and trading profit declining
Tough SA economy is curtailing new store expansions
Masscash’s competitiveness remains under pressure until the government steps up tax compliance and enforcement to level the playing field
Game Liberty Midlands Mall
Builders Trade Depot Rossburgh
Makro Crown Mines

16. Outlook
Trading is challenging for South African retailers, this is the new normal. Facing a climate of geo-political uncertainty and declining globally growth forecasts, South Africa’s GDP forecast for 2019 is now below 1.5%. Domestic policy challenges, upcoming elections, fiscal constraints, high unemployment, low business and consumer confidence and low investment growth compound the pressure on consumers disposable income.
In this environment the Group continues to settle from the massive restructuring of two divisions, gearing to reap the rewards of system enhancements across the Group to facilitate collaboration and value-added services improvements, as well as achieve the fine and important balance between inter-divisional co-operation and competition.
A difficult year, to be sure. But by following the tight expense management we have become accustomed to seeing at Massmart and remaining resolute about their strategic focus areas, we look in anticipation to the Group forging ahead on sound footing.
Makro Riversands
Game Liberty Midlands Mall

17. Maryla Masojada. |. Lead Analyst Carey Leighton. |
Maryla Masojada | Lead Analyst Carey Leighton | Associate Economic Analyst