Massmart reported an increase in earnings

An interim dividend of 252 cents was declared, unchanged from the previous period.

Operating profit before foreign exchange movements was up 12.7% to R1.26 billion, while revenue was up 13.4% to R27.48 billion.

The group said that while sales growth for most of the six months to December 2010 was strong, the softer sales growth over Christmas, and in the eight weeks since then, suggest that the South African economy might not yet be in a sustainable recovery.

Total sales growth for the six months to December 2010 was 13.3% with comparable sales growth of 7.3%.

The group's gross margin of 18.06% was slightly higher than the prior year's 17.81%, as margins recovered to different degrees in all divisions.

Divisional store sales

Massmart said that divisional comparable store sales in Massdiscounters, which includes Game and Dion Wired, increased by 9.0% with estimated deflation of 8.2%.

Total sales increased by 14.4% and trading profit before tax increased by 17.9%.

Divisional comparable store sales in Masswarehouse, which operates its Makro warehouse stores, increased by 7.8%, with estimated deflation of 1.2%, while trading profit before tax increased by 10.5%.

Total sales increased by 10.7% with the opening in October 2010 of the new Makro Vaal store, which increased trading space by 9.0%.

Massmart said that divisional comparable store sales in Massbuild, which includes Builders Warehouse, increased by 11.8% with estimated inflation of 0.3% and total sales increased by 18.6%, with trading profit before tax increasing by 36.1%.

"The division has performed well in a difficult market. Whilst the metrics of the South African residential market have stabilised, there is little reason to believe the market has grown," it said.

Pupkewitz acquisition cancelled

The group added that after being unable to reach agreement with the Namibian authorities, discussions concerning the acquisition of the building materials business, Pupkewitz, had been terminated.

Divisional comparable store sales in Masscash, the group's wholesale and retail cash and carry business, increased by 4.2% with estimated deflation of 1.3% and total sales increased by 12.5%, while trading profit before tax decreased by 15.5%.

"As we have seen in previous economic cycles, food deflation made trading challenging, while volumes increased and trading margins were maintained, growth in comparable sales was below cost increases with the resultant pressure on profitability. With a 25% exposure to commodities, the wholesale division was particularly adversely impacted," the company said.

Net trading space increased by 8.7% from December 2009 to a total of 1.25 square metres, but Massmart said there were signs of inflation returning to certain food categories and during the six-month period one store was closed, 16 opened, and five stores acquired, resulting in a total of 308 stores at December 2010.

Rand strength against the dollar again depressed rand earnings from Massmart's African businesses and resulted in a foreign exchange translation loss of R79.5 million from R13.9 million in 2009.

Difficult road ahead

Looking ahead, Massmart said that should the trends experienced in the Christmas period and the subsequent eight weeks continue, it expects a difficult second-half.

Management would focus on reducing stock levels, holding gross margins and containing costs, and continuing to grow annual operating profit, albeit perhaps at lower levels than achieved in the first-half of this financial year," it said.

For the 34 weeks to February 20 2011, total sales increased by 12.6% and comparable sales increased by 6.4%.

Wal-Mart merger

Massmart added that a significant amount of its time and resources have been committed to the Wal-Mart transaction.

"The approval by Massmart shareholders and the recent positive referral by the Competition Commission give us confidence that the transaction is seen as positive for all stakeholders," it said.

The transaction remains subject to approval by the Competition Tribunal which is hearing the matter on 22 - 24 March 2011.