Massmart in retail revolution

The only big obstacle is the SA Clothing & Textile Workers' Union's objections, which the tribunal will consider at a hearing in late March. Massmart chief financial officer Guy Hayward says that while nothing is ever certain, he believes the union's bid to abort the deal will fail.

On having the global retail giant, which boasts sales of over US400bn, as Massmart's parent, Hayward says: "It's a thrill to have the world's biggest and arguably best retailer in SA."

Ramping up the competition

His enthusiasm will not be shared by retailers readying themselves for a competitor most analysts feel will change the face of retailing in SA.

Walmart will launch its assault on SA's retail market at a time when consumer spending is waning. "Sales began slowing in November and December and this continued in the first two months of 2011," says Hayward.

Despite the slowdown and average price deflation of 2.9%, sales across Massmart's 308 stores in the six months to December rose 13.3% compared with the same period in 2009 to R27,37bn. However, growth was off a depressed base in the second half of 2009 during which a 0.5% fall in like-for-like store sales volume was reported.

A 6.5% rise in headline EPS in the six months to December 2010 to 365.8c followed a fall of 19.9% in the six months to December 2009. The latest interim EPS were muted by the strong rand's impact on profits from its 25 stores in 12 other African countries and on a constant currency basis were up 13.1% at 394.1c. But even with this adjustment, EPS were well below the 432.6c reported in the six months to December 2008.

Rocky second half

Investors expecting a better showing in the second half of 2010/2011 are likely to be disappointed. Massmart warns of "a difficult second half", which indicates that an I-Net consensus forecast of a 23% rise in EPS in 2010/2011 is too optimistic.

Clearly, the Walmart factor is playing a key role in Massmart's heady 26 p:e, almost double its average 14 p:e since 2000. The impact of Walmart can't be underestimated - Massmart notes that integration with its new parent will be a focus area. But what will the impact be?

Changing face of food retailing

Nedbank Capital's head of retail research, Syd Vianello, expects to see Walmart making a big play in food retailing, a fair bet since it is the largest food retailer in the US.

It is possible that within five years Massmart could transform from a general retailer selling food into a food retailer selling general goods, says Vianello. He sees Cambridge, a small food retail chain bought by Massmart in 2008, leading the food retail drive.

Foodco

Certain Game stores are also being converted into retail Foodco stores, but tending to support Vianello's view, Hayward says Cambridge, which targets the lower end of the market, is achieving good brand awareness. Massmart's 26 retail food stores generated sales of R3,5bn in the six months to December 2010. Vianello believes up to 200 Cambridge stores could be opened over the next few years.

It has the makings of a titanic battle with other retailers and what this would mean for profit and dividend growth from Massmart is a matter of conjecture. What's more certain is that Massmart's capital expenditure would rise sharply.

For investors wanting to back the Walmart factor, Massmart may be worth the risk. Cautious investors are more likely to sit on the sidelines and watch the battle lines being drawn.

Source: Financial Mail