Walmart’s 51% stake in South African retailer Massmart continues to disappoint as the retailer forecast more lower-than-expected earnings across all four of its divisions for the six months ended June 30.
Massmart will officially report six-month earnings on Aug. 29, but the retailer said losses are expected to widen despite comp sales growth of 3.6%, with inflation being 2.7% of that gain.
Massmart said sales rose 5.5% to $3.1 billion (U.S.) in the six months. The retailer’s local operations underperformed relative to those outside South Africa, with total sales rising by 4.9% and 11.8%, in Rand terms, respectively, noted IGD analyst Stewart Samuel.
“The slowdown was most marked at its Massdiscounters and Masswarehouse divisions, while the performance improved slightly at Massbuild and Masscash,” IGD noted.
Massdiscounters lackluster performance resulted in new leadership effective July 1 as CEO Albert Voogd was replaced by interim chief exec Andrew Stein. The retailer also appointed Riaan Turton as finance director and Kathrine Madley as marketing director. Neville Hatfield became merchandise director in July. Masscash CEO Kevin Vyvyan-Day also announced his resignation effective Aug 31 and will be replaced by interim chief executive Deepa Sita.
The four divisions of Massmart include Massdicounters, Masswarehoue, Massbuild and Masscash. The company expects to post operating losses of $2.1 million (U.S.). The retailer cites softer-than-expected sales, margin weakness and expense growth of roughly 12% in the past six months. Store expansion caused higher employment and occupancy costs which hurt profits. The company also cited cost inflation as a factor.
Walmart ushered in new leadership this summer for Massmart appointing Mitch Slape as president and CEO for the African retailer. Slape is known for turning the Walmart business in Japan around and dubbed the “fixer” in retail circles.
In June, Richard Mayfield, chief financial officer for Walmart International, took part in the Deutsche Bank global consumer conference. He was asked about Massmart’s future given the top two leaders in that market recently resigned. Mayfield said Walmart would evaluate the Massmart business in the coming months. He admitted the $1.58 billion investment in 2011 has been challenging, with many of the challenges related to the economies in Africa, he said.
The Massmart business has been under pressure in the first half of this year and the retailer operates mostly in general merchandise which is a discretionary spend. Walmart owns 52% of Massmart with roughly 400 locations, heavily concentrated in South Africa.
“Mitch (Slape) is a pretty experienced international retailer and we’ve hired Mohammed (Abdool-Samad) a new chief financial officer out of Illovo, which is a publicly quoted sugar business owned by ABF,” Mayfield said.
Abdool-Samad began that role Aug. 1.
“We feel pretty good about that management team. I think the first job is to trade the business well, but clearly, we’ll be reviewing the portfolio of businesses and the operating model. I think there is a lot of opportunity for efficiency and cost savings,” Mayfield said.
He said reducing costs related to goods not for sale is one area the company would focus in the coming months. He said the costs can account for up to 25% of a retailer’s total operating costs.
“We think there are some big opportunities to create value in that business (Massmart) and clearly, with a new management team in place we’ll be looking to do that,” Mayfield said.
Massmart’s holdings are concentrated in South Africa with 390 retail units. The next largest is Botswana with 11 retail units, and Zambia having 7 locations. Mozambique has 6 stores and Nigeria has 5 locations. The other countries have less than 5 retail locations – Ghana (4), Lesotho (3), Malawi (2), with Swaziland, Tanzania and Uganda each having just one location.
Amid the economic slowing across the continent, Massmart began transitioning some of the mass discounters and mass warehousing distribution centers into Massmart Logistics, a segment that will be used to support future growth, according to the annual report.