Game is a subsidiary of Massmart. Picture: FINANCIAL MAIL

Game is a subsidiary of Massmart. Picture: FINANCIAL MAIL

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For almost a decade Massmart has been dishing up one disappointment after another to investors. There are signs that their patience will at last be rewarded, but these remain, at best, tentative .

Massmart delivered some hope to investors in its half-year to June, lifting headline EPS (HEPS) a solid 14.2%, and an even better 19% if noncash foreign exchange adjustments are excluded. It was its strongest showing since becoming a 51%-owned subsidiary of Walmart in a US$2.54bn deal that was closed in June 2011.

"We could be seeing the benefits of [Guy] Hayward’s appointment as CEO [in April 2014] starting to come through," says independent retail analyst Syd Vianello. "I have always said he was put into the position by Walmart to fix the business."

However, what is still needed is definitive evidence that Massmart is regaining the traction it began losing well before the advent of Walmart. HEPS had peaked three years earlier, in 2008, at 663c, and seven years on were still 22% lower at 516.3c, just 1.3% up on 2014.

Massmart’s dismal profit showing was far from being due to a lack of expansion. Between 2008 and 2015 store numbers grew by about two-thirds, from 242 to 403, and sales more than doubled, from R39.8bn to R84.7bn.

First to take its toll on profits was a R5bn capex programme, launched in 2008 primarily to remedy a serious gap in Massmart’s supply chain: the absence of centralised distribution. The eight central distribution centres that were built added a big dose of costs.

The integration into the Walmart stable was also disruptive and costly, setting Massmart back altogether R799m in 2011 and 2012.

No sooner had Massmart put the Walmart integration behind it than it was beset by another costly problem: a rapid deterioration of profits in its Massdiscounters division.

Dominating the division is one of Massmart’s flagship brands, Game, which began hitting multiple problems in 2012. Not least was its failure to rejuvenate its ageing stores.

Also taking Game by costly surprise was a rapid change in the consumer electronics environment. Big-selling product lines such as cameras and laptops gave way to smart phones and tablets.

The overall impact on Massdiscounters’ profits was devastating. Profit before interest and tax (PBIT) slumped a huge R563m, from R744m in 2011 to R181m in 2014.

Trading margin also collapsed, from 5.6% in 2011 to 1% in 2014. Massdiscounters accounted for 34% of Massmart’s PBIT in 2011.

The first positive sign of a recovery came in 2015, when Massdiscounters lifted PBIT to R235m. It followed this through in the latest six months, when PBIT came in 110.8% up year on year at R62.4m on a 7.6% rise in sales to R6.95bn.

"Game is key to the Massmart investment case," says Warren Jervis, manager of the Old Mutual Small & Mid Cap fund.

"Massdiscounters should be capable of producing annual EBIT [earnings before interest and tax] of R600m-R700m."

Another big test will come in the second six months, with Game’s performance over the crucial festive season holding the key.

Massmart CEO Guy Hayward is confident Massdiscounters will maintain its positive momentum. "We have done a lot of work upgrading stores and the supply chain, reducing inventory levels and improving cost control," he says. "We have also exited certain product categories and introduced new ones."

But the really big winner for Game is its move to food and liquor retail through the FoodCo brand. In the latest six months it accounted for 21.8% of the Massdiscounters division’s total sales.

Its sales growth still has a long way to go, believes Hayward. "We are adding 10 [FoodCos] a year," he says. There are now 82 FoodCos in the 139-store Game chain.

The turnaround at Game has for the past two years been engineered by Massmart veteran Robin Wright, who will soon step down as Massdiscounters’ CEO. He will be replaced by Albert Voogd.

Voogd will bring with him experience gained in developed and emerging retail markets during his 20 years with Ahold, the Netherlands’ largest grocery group. Among positions he has held at Ahold (whose sales run to €9bn/year) is that of director of international projects in its largest market, the US.

Voogd’s grocery market experience is significant at a time when food and liquor are playing a fast-increasing role in determining Massmart’s performance. "Food and liquor now account for nearly half the group’s sales," says Hayward.

Across the group it grew by 13.2% in the latest six months, saving the day for Massmart, where merchandise sales grew by a mere 3.4%.

Total group sales grew by 8.7% to R42.3bn.

The biggest contributors to food and liquor sales are the Masswarehouse division, housing the 20 megastore Makro section, and the Masscash division, which houses the group’s cash-and-carry wholesale operations and the 52-store Cambridge and seven-store Rhino retail businesses.

Food and liquor as a driver of sales and profit growth have taken on even more significance in the wake of sharp deterioration in the fortunes of building supply division Massbuild, which generated 28% of group EBIT in the six months to June.

"Massbuild is being affected by a lack of confidence among upper-income consumers," says Hayward. "It is the division most linked to the health of the consumer economy."

Overall, Massmart is experiencing a deterioration in sales momentum. Growth slowed from 8.7% in the six months to June to 8.3% in the 34 weeks to August 21. "Sales growth began slowing in May and June and has continued a broad-based fall," says Hayward.

On balance, Massmart appears to be on the right track to achieving a long-overdue recovery. What is lacking is a robust economy.

It suggests that Massmart, on a 26 p:e, represents at best fair value.