July 30, 2019 / 2:14 PM / 24 days ago

UPDATE 2-Massmart shares hit 13-year low after warns of loss

* Flags HY loss of up to $2 mln

* Margins lower than anticipated across all divisions

* Flags headline loss per share (Adds details)

By Nqobile Dludla

JOHANNESBURG, July 30 (Reuters) - Massmart has warned it expects to make a loss in the first half of the year as a result of softer than expected sales, margin weakness and higher expenses, sending its shares to a 13-year low.

Massmart, in which Walmart has a majority stake, is the latest South African retailer to confirm tough domestic conditions as increased value-added tax, unemployment and inflation coupled with higher fuel prices reduce consumer spending power.

Massmart generates 91.3 percent of group sales in South Africa. In May it had flagged flat first-half operating profit before interest, depreciation, restructuring, non-trading items and taxation.

Compounding pressures on the group is the restructuring of its Massdiscounters and Masscash divisions, as well as price deflation in food and durable goods which have squeezed profitability as costs increase.

The retailer, which owns general merchandise and food wholesaler Makro, said it expected to report an operating loss before non-trading items, foreign exchange movements and net interest of between 0 and 30 million rand ($2 million) for the six months to June.

That compares with operating profit before foreign exchange movements and interest for the previous corresponding period of 547.5 million rand.

Shares in Massmart fell as much as 27% to a level last seen in July 2006 and closed down 15.45%.

“Reflecting the difficult consumer environment, margins were lower than anticipated across all divisions in May and June, which resulted in a disappointing group financial performance for the six months to June 2019,” the company said.

Margins have been under pressure from “the lower sales participation in its higher-margin durables and home-improvement categories formats,” Massmart said.

Sasfin Wealth Equity analyst Alec Abraham said: “I have maintained for some time that the economic environment prevalent in South Africa for almost a decade now is simply not supportive of Massmart’s business model, namely high volume, low margin, in a moderately and consistently rising inflation environment.”

Massmart like Africa’s largest supermarket chain Shoprite is also battling with currency weakness elsewhere in Africa, especially in Zambia and Nigeria, resulting in a foreign exchange loss forecast of 81 million rand for the half year.

The retailer said excluding the impact of accounting standard IFRS 16, headline earning per share for the half-year period is expected to swing to a loss of between 240.5 cents and 249.8 cents from a restated 94.8 cents profit in the prior period.

$1 = 14.1842 rand Reporting by Nqobile Dludla Editing by Louise Heavens/David Holmes/Jane Merriman

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