| Wed 4 Dec 2002, 15:17 | | Chairmans Statement |
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MASSMART HOLDINGS LIMITED - ANNOUNCEMENT
Massmart Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 1940/014066/06)
Share code: MSM ISIN: ZAE000029534
("Massmart" or "the company")
EXECUTIVE CHAIRMANS STATEMENT TO THE MASSMART HOLDINGS LIMITED ANNUAL GENERAL
MEETING - 4TH DECEMBER 2002
Introduction
We welcome shareholders to this, the 3rd Annual General meeting of Massmart
Holdings Limited.
Notice of this meeting was circulated in our annual report for the year to June
2002, a report that we hope signals our unreserved endorsement of, and
commitment to, the principles and practice of good corporate governance. We
believe that any additional costs and efforts expended in the pursuit of good
governance will be more than compensated for within companies, by heightened
awareness and vigilance and externally by enhanced relationships and credibility
with all stakeholders.
Environment in Massmart`s current financial year
Although inflation has exaggerated growth rates, the South African consumer
economy has continued to perform well in real terms.
Consumer`s relatively high confidence is reflected in a steady growth of real
retail sales as reported by the Central Statistical Services, the Retail Liaison
Committee and in the recent results of public companies. The strength of the
economy is reflected more broadly in the 3% growth of the third quarter,
seasonally adjusted gross domestic product. There are early indications that
the growth of inflation may be declining in response to the strengthening of the
Rand against the currencies of major trading partners and the cumulative effect
of four interest rate increases during the year.
Retailers have been challenged by the broad based, unprecedented, rapid rise in
inflation over the past nine months and the associated difficulties in measuring
real sales and profits, forecasting accurately and controlling inventory and
costs. These challenges will continue and may even increase as inflation
declines.
Performance
Within this environment, Massmart`s trading and growth strategies have been
resilient.
Since the start of the current financial year each of the four divisions has
made progress towards its strategic and operating objectives.
Massdiscounters, our retail discount division comprising Game and Dion, has
performed well ahead of sales and profit expectations, extending its Southern
African footprint with the relocation of the highly successful Gabarone Game
outlet to enlarged premises in October and the best ever opening of Game store
in Mauritius last month.
- Masswarehouse is our large warehouse wholesale and retail division, which
comprises Makro and, if all suspensive conditions are met, will include our
latest acquisition Builders and Tile Warehouse. Makro has performed in
line with expectations with a strong performance in food, where a
commitment to combating inflation resulted in excellent wholesale value and
increased patronage by our reseller customer base. A new 11500 square
meter Makro store was opened at Strubens Valley on the West Rand in
October. This, the first new Makro to be opened in 6 years, exceeded our
expectations both in respect of it`s own performance and in respect of the
limited deflection of sales from other Massmart stores in the catchment
area. Notwithstanding its good performance, the pre opening costs of this
outlet will result in a negative contribution from this store for the six
months to December 2002 and possibly for the year to June 2003. Despite
this, the Makro chain is expected to perpetuate its solid record of real
earnings growth
- Masscash, our cash and carry wholesale division, comprising CBW and Jumbo
has traded aggressively and performed well. CBW opened new stores in
Nelspruit in October and Vereeniging in November. Jumbo successfully
concluded the refurbishment of its Crown Mines outlet and the relocation of
the Bloemfontein store to larger, modern premises. To date profits in the
Masscash division are ahead of expectations and well ahead of last year.
- Masstrade, the division that houses our Shield and Furnex buying
associations, continues to make progress with integration while performing
in line with sales and profit expectations.
Massmart`s results for the 22 weeks to Sunday 1st December 2002 are gratifying.
Sales growth before acquisitions is 32% with total sales growth including
acquisitions over 35%. Comparable store sales growth for the same period is
29.7%. Profitability is ahead of budget and well ahead of the comparable period
last year.
Inflation
With over 280 000 line items, within 1 940 article groups, in 15 major
merchandise categories, in seven chains, within four divisions in eight
countries, it is impossible to accurately calculate the impact of inflation on
Massmart`s performance.
Using weighted baskets of major items, we have determined that for Massmart`s
financial year to date, liquor inflation is approximately 15%, general
merchandise inflation is approximately 14% while food, almost all of which is
sold for resale, is approximately 16%. Shareholders are reminded firstly that
in respect of food, Massmart is predominantly a wholesaler and comparisons with
retail food inflation should be qualified accordingly. Secondly, Massmart does
not sell bread, fresh fruit or vegetables and very little meat, each of which
are important contributors to the 19.8% food inflation as reported by Central
Statistical Services in October.
While inflation has exacerbated the complexity of forecasting and merchandise
planning, our preoccupation has been with controlling expenses to ensure that
when inflation declines to the 4% - 7% range (where we expect it to remain for
some time), we will not experience a profit squeeze arising from the aberrant
expense to sales ratios.
Acquisitions
Effective from 1st January 2002, the Furnex acquisition is contributing to the
current first half of Massmart`s financial year for the first time. The major
initiatives surrounding the integration of Furnex and Shield will be completed
by the end of 2002 with full integration targeted by June 2003.
Good progress has been made with the resolution of the suspensive conditions
related to the Builders Warehouse acquisition announced on the 9th October 2002.
The due diligence review is at an advanced stage and the submission to the
Competitions Commission will be made this week.
Prospects
We retain our positive view on the fiscal and monetary management of the South
African economy, recently acknowledged in the upward review of the country`s
credit rating by Standard & Poors, and we welcome the statements by the Minister
of Finance indicating an increased emphasis on growth.
We expect some consolidation of retail growth in the first half of 2003 as the
cumulative interest rate increases of 2002 dampen real consumer spending and
nominal growth declines in sympathy with declining inflation. There is also
reason for concern about drought and its possible impact on food prices and the
financial health of rural communities.
Thereafter, in the absence of any unforeseen exogenous events, we anticipate
falling inflation, declining interest rates and a steady, protracted growth of
consumer spending in 2003 and 2004. The continuing rationalisation of retail
space across many sectors of South African retail will contribute to a more
stable, profitable industry.
Insofar as Massmart is concerned we see little to impede a good Christmas
trading period but remain cautious about the second half of our financial year.
Firstly, as mentioned above, we anticipate tighter economic conditions in the
first half of 2003 and secondly we are being challenged to exceed Massmart`s
strong performance in the previous comparable period, which resulted from the
inclusion of the Jumbo and Browns and Weirs acquisitions for the first time, an
additional two months sales from Makro Woodmead, a 53rd week, and inflationary
pressure in selected product categories.
Second half growth off this high base is therefore likely to be relatively muted
but we remain confident that Massmart will produce a real growth of earnings at
the forefront of the sector.
Date: 04/12/2002 01:41:28 PM Produced by the JSE SENS Department
