Massmart shares slump on concerns of slow return to profitability

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GIANT retailer Massmart took an 11 percent knock on the JSE on Friday amid concerns about the slow progress in returning the group to profitability during the 26 weeks ended June 2021 despite an increase in sales during the period under review.

The shares closed the day 9.14 percent lower at R54.95.

Massmart, a subsidiary of US multinational retailer Walmart, told investors that total sales amounted to R41.3 billion, representing an increase of 4.4 percent on the same period last year.

It expected headline losses to reduce to R700 million from a R1bn headline loss a year earlier. It also said total sales from Game had fallen to R7.6bn, down 7.6 percent in the half year compared to a year earlier with comparable store sales being 6.9 percent lower given the prevalence of Game stores in malls.

“Foot traffic in most super and regional malls and retail centres remained constrained, as consumers prefer to avoid crowded indoor spaces in light of Covid-19 infection concerns,” said Massmart.

Game has struggled to return to profitability despite several steps to resuscitate the brand including discontinuing frozen and fresh produce.

Massmart said it expected its earnings to be adversely affected by the impairment of the carrying value of assets in Game of R570m and retrenchment costs relating to the reorganisation of certain home office support functions.

Massmart recorded a 9.4 percent decline in sales at Cambridge to R3.4bn lower than the same period last year and 9.6 percent lower on a comparable stores basis.

“Sales trends indicate that customers in this segment of the market are mostly impacted by the pressures of increased unemployment and lower disposable income,” said Massmart.

Cambridge and Massfresh outlets are treated as discontinued operations after the company in March announced its intention to put them up for sale.

To add insult to injury for investors, Massmart said insurance cover was in place for last month’s riots in parts of Gauteng and KwaZulu-Natal, but would not fully offset the losses suffered.

Massmart received a R4bn loan from Walmart last year to cushion the impact of the Covid-19 pandemic a year ago.

Commenting on the trading statement, independent analyst Sydney Vianello said Massmart’s problem was its balance sheet.

“After taking into account the current loss, there is very little equity left and if the intangibles are deducted, there is no equity left. The company trades on the generosity of loans from Walmart, plus creditor funding. If the creditors stop offering credit lines, they are in big trouble.

“Walmart does not have to stand behind Massmart, they could walk away and let the whole thing collapse, if they want to do so. My guess is they will convert their loans into equity via a rights issue and dilute other shareholders to nowhere,” Vianello said.

Vianello believed that the market was spooked by the reality that the losses from the looting would not be fully recovered from insurance.

“Who knows what the impact of this may be,” he said.

Massmart said a total of 43 stores and two distribution centres had been directly impacted by the recent civil unrest and looting.

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