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Consumer goods specialist AVI has released results for the six months to December 2021. The company has struggled to find revenue growth in the past few years, relying instead on cost control and efficiencies to drive growth in headline earnings per share (HEPS).

The latest period is no different, with just 2.3% in revenue growth and a 2.5% decline in selling and administrative costs. The net result in a 6.7% increase in operating profit and a 7.1% increase in cash from operations, with the difference mainly attributable to movements in non-cash items. Notably, R103.3 million was paid out under the I&J Black Staff Scheme.

AVI achieved a 6.6% increase in HEPS. Almost in line with HEPS, the dividend per share has increased by 6.3% to 170 cents.

The failed deal with Mondelez for Snackworks was a costly affair, with expenses of R20 million incurred along the way. To put that into perspective, the civil unrest only resulted in R36.9 million in direct costs across Snackworks and Spitz.

At segmental level, Food and Beverage brands grew revenue 3.8% and operating profit by 4.8%, with the margin expansion driven by cost control. In Fashion Brands, revenue fell 2.9% but operating profit jumped by 14.4% thanks to considerable margin expansion in Footwear & Apparel.

Tea fans will find it interesting that the rooibos business suffered reduced selling prices, which negatively impacted revenue. Black tea revenue increased, as price increases more than offset the lower volumes in this period vs. the lockdown period where people were at home a lot more.

It wouldn’t be right to talk about tea and not coffee. In the latter, the Ciro out-of-home coffee business improved but is still not at historical levels. Customers include hospitality, leisure and corporate entities.

In Snackworks, biscuit revenue increased 7.3% (including volume growth of 1.3%) and snacks revenue increased 4.5% despite a drop in volumes.

I&J reported revenue growth of just 0.8%. Operating profit margin increased from 10.2% to 12.9%, with a favourable product mix and increased volumes in the abalone business.

I’ll touch on one more underlying business unit: Footwear and Apparel. Revenue fell just 1.1% despite an 11.5% drop in footwear volumes, which gives you a taste of inflation in this category. The volumes were hit by the civil unrest and other supply chain challenges.

AVI is in for a tough year unless the conflict in Ukraine is resolved quickly. Commodity prices are going through the roof, which is a major inflationary concern for the food businesses in AVI. Consumers will be under considerable pressure, which isn’t good news when trying to sell them biscuits (or upmarket shoes, for that matter).

Managing volumes, selling prices and ultimately gross margins will be the difference between success and failure this year. That’s no different to any other year; it’s just going to be much harder than usual in 2022.

Massmart has been releasing ugly announcements for so long that I’ve run out of puns. I’ve used Messmart quite often, along with references to the pink elephant in the room (Game). Their financial troubles have outlasted my creativity.

It’s hard to find positives in the story. One silver lining is that Massmart is the second largest retail website traffic generator in South Africa, so the group has made an effort to compete with Takealot. Massmart believes it has an opportunity to become the business-to-business and business-to-consumer omnichannel market leader.

Opportunities are great, but execution is what matters.

To be fair to Massmart, the riots were particularly terrible for the group in 2021. We all remember the shocking scenes on TV of the Game warehouse being looted. It says something for Game’s perception in the investment community that friends of mine joked that Game might be better off on a net basis from getting the insurance payout, since it may have struggled to sell the stock. People are incredibly bearish on Game’s prospects.

Total group sales decreased by 1.9% in 2021, with comparable store sales up 1.7%. This means that the store footprint decreased overall, as the group rationalised its operations and tried to steady the ship.

This needs to be viewed against the “other income” line which includes insurance proceeds related to the riot. This line increased by 280.9% to R1.1 billion. Group sales were R84.9 billion, so this would add another 1.3% to the sales line. It’s definitely not enough to make up for the real issues in the business.

Massmart Wholesale (mainly Makro) could only grow sales by 1.1%. Builders was the star with 7.1% growth. Unsurprisingly, Game was a disaster with sales down 8.7%. Game has 146 stores and 114 of them were updated into “Stores of Excellence” during the year – you can make up your own mind on how excellent they are.

It’s very difficult to manage gross margin when sales are under pressure, so the impact was amplified by a 191bps deterioration to 18.5%. A large part of this was driven by inventory write-downs in the riots, so the more sustainable view is a drop of 45bps to 19.9%. That’s still a rough result.

There’s some good news further down the income statement, with expenses down by 1.2%. It’s just nowhere near enough unfortunately, with trading profit down a whopping 83.3% to R195.4 million.

Below that line, there’s an impairment of over R1 billion, of which nearly R231 million is linked to the civil unrest and R507 million is linked to Game, which must be a swearword at Walmart by now. To add further insult to injury, there’s a foreign exchange loss of R178.5 million.

Here’s the much bigger problem: net interest expenses increased by 2.3% to R1.78 billion. That’s over 9x higher than trading profit, taking the net loss to an eye-watering R2.2 billion. This is largely due to lease expenses (and the crazy accounting of IFRS 16), so I must point out that interest-bearing borrowings (the type of debt that isn’t distorted by accounting rules) are “only” R6.5 billion.

Massmart’s headline loss increased from an already-terrible R924 million to a truly spectacular R1.5 billion.

If you’re wondering how things might look going forward, take note that liquor sales were prohibited for 110 days in this financial year, leading to lost sales of R1.8 billion and lost margin of R193 million. That would’ve nearly doubled trading profit, but wouldn’t have come close to achieving a net profit overall.

Other Covid-related costs came to R77.7 million. The TERS scheme and negotiated rental relief came to R62.2 million. This means that health and safety costs of the virus were largely passed on to government and landlords.

The store closures due to the unrest led to lost sales of R2.7 billion, with lost margin of R473 million.

Provided the deal goes ahead to sell Cambridge, Rhino and Massfresh to Shoprite (and I still have no idea why Shoprite is buying them), punters can look at continuing operations for a clue of what the performance might look like going forward. Those sales increased by 0.1%, so the story is hardly any better.

Capital expenditure in 2021 was nearly R1.4 billion. This is another challenge – retailers need to keep investing to stay relevant with consumers. When they are in deep trouble, trying to turn things around is extremely difficult.

Sales in the eight weeks to 20 February 2022 are up 1.7%, with comparable store sales up 5.1%. In continuing operations, those numbers are 3.6% and 6.6% respectively. That’s at least starting to sound respectable.

In a surprise to absolutely no one, there is no final dividend.

I continue to wonder how much patience Walmart will continue to have with Massmart. The share price is down nearly 27% this year.

The Foschini Group (or TFG – they stole my listing ticker before I became big enough to be a listed company!) is making a significant acquisition in South Africa, which is always great to see. A few years ago, JSE corporates could only bring themselves to invest offshore. After many of them took a beating in markets like Australia and the UK, they are now looking closer to home.

TFG is buying Tapestry Home Brands, a group which owns businesses that you will immediately recognise: Coricraft, Volpes, Dial-a-bed and The Bed Store. The sticker price is R2.35 billion.

Locally manufactured products account for 47% of sales, with manufacturing facilities in Cape Town, Johannesburg and Gqeberha. The group employs approximately 2,500 people.

Tapestry has around 175 stores across South Africa, Namibia and Botswana. The stores are organised into three business segments that operate on a decentralised basis, so there’s an entrepreneurial culture underneath all this.

The sellers are Westbrooke Investments (a name you might recognise from Magic Markets as monthly guests on our show), funds managed by private equity house Actis and the current and previous management of Tapestry. This was a classic private equity structure.

The rationale for TFG is clear: this brings new products and categories into the group. It also brings a significant local manufacturing and distribution base, which TFG may be able to plug into its other stores. TFG is working to bring its supply chain closer to home, which would be a significant competitive advantage if it can be delivered. Given the current geopolitical nightmare in the world, deglobalisation is the next big thing.

TFG has a well-developed credit model which will be useful in boosting sales in the Tapestry businesses. There’s also plenty of experience in online shopping channels, another useful way for the groups to work together.

After this acquisition, TFG will have nine home consumer brands and four vertically integrated factories producing mattresses, upholstered furniture, household textiles, duvets and pillows.

The deal price was calculated based on normalised earnings before interest, taxes, depreciation and amortisation (EBITDA) of R360.9 million for the year ended February 2022. The EV/EBITDA multiple is 6.51x, which is typical for a deal like this in the South African market.

If EBITDA for this period comes in below R342 million (i.e. more than 5% lower than target), then the price is adjusted downwards based on that multiple.

The net asset value at 28 February 2021 (note: not directly comparable to the period referenced above) was R115 million. By January 2022, this had ramped up to R209 million. EBITDA in the 2021 financial year was R264 million (including a Covid-related claim of R86 million) and profit after tax was R34 million.

In the 11 months to January 2022, EBITDA was R329 million and profit after tax was R175 million. This gives an idea of what needed to be achieved in February to get the full selling price.

The non-management sellers will get their money when the deal closes. The sellers who are also part of management will have a portion of their payment delayed until the first and second anniversary of the deal as a retention tool.

The major hurdle to still jump over is the Competition Commission, although an acquisition like this should be ok as TFG doesn’t operate in the categories it is acquiring. Other conditions precedent relate to the Takeover Regulation Panel, consent from the lessors etc. A period of seven months has been set to achieve these conditions.

As this is a Category 2 transaction, TFG shareholders will not be asked to vote on the deal.

Strategically, I think this is a sensible move. A quick look on TIKR shows that Foschini is trading on an EV/EBITDA multiple above 12x, so this is an earnings accretive transaction. Most of all, I’m just happy to see investment in local supply chains, a key source of jobs in a country that desperately needs them.

Cashbuild released its interim results for the six months ended 26 December 2021. The company operated 317 stores by the end of the period, including 54 P&L Hardware stores. Customers range from DIY enthusiasts through to contractors and farmers.

People are having to pay up for these products thanks to inflationary pressure, with selling price inflation running at 8.8% in December 2021.

One would think that the riots were a net positive for the group given the opportunity to sell building materials for rebuilds, but one would be wrong. It’s taken a long time to reopen all the stores and get over the associated disruptions. Revenue fell by 12% in this period. I’m up nearly 12.5% in my Cashbuild position anyway, despite the sales pressure.

This negative impact was cushioned ever so slightly by an increase in gross profit margin from 26.4% to 26.6%, so gross profit fell by 11%. Despite a significant drop in operating expenses, operating profit still fell by 14%.

The impact on headline earnings per share (HEPS) is even larger, down 27% from the prior period.

The group paid a final dividend despite this environment, contributing to a 33% drop in cash. Insurance payments related to looted stores have not yet been received. These will obviously help significantly with the balance sheet.

The momentum into the period since year-end hasn’t been pretty, as is expected when lapping such a substantial revenue base. Revenue for the six weeks since 26 December is down 10% year-on-year.

Nevertheless, Cashbuild has declared an interim dividend of 587 cents per share. This is an interim dividend yield of 2.15% on yesterday’s closing price.

The share price is up nearly 7.3% this year and down almost 10.9% in the past 12 months.

Note: I hold shares in Cashbuild

Woolworths has released results for the 26 weeks to 26 December 2021. The share price rallied 6% despite a fair share of negative commentary on Twitter.

In the introduction of the SENS announcement, Woolworths discloses the movements in seven measures of income and profitability and every single one is negative. Turnover and concession sales have fallen 2.1% and headline earnings per share (HEPS) is down 35.6%. Adjusted HEPS fell by 16.3%.

On the plus side, a net debt position of R6.8 billion has improved substantially into a net cash position of R258 million. This gives Woolworths breathing room to fight back. There’s also an interim dividend of 80.5 cents per share, despite the obvious pressures on the business.

The surprising dividend news is that David Jones has declared a special dividend of AUD90 million to Woolworths, which will be used to reduce debt in South Africa. After years of that hurtful relationship, David Jones is finally buying flowers to say sorry. This would’ve helped in Woolworths’ decision to pay an interim dividend.

Delving deeper into the details, we see that sales momentum improved in the last six weeks of the period, with sales up 3.5% in constant currency terms. This is the all-important Black Friday and festive season period, which was helped along by the lifting of restrictions in Australia.

Online sales grew 22.4% and now contribute 13.7% to group turnover.

In Fashion, Beauty and Home (FBH) in South Africa, online sales grew 19.2% and contributed 4.4% of sales. In Food, online sales increased by a whopping 55.8%, contributing 3.1% of sales. In David Jones, online increased 44.2% and contributed 28.1% to sales. In Country Road, online sales increased 3.6% and contributed 33.8% to sales.

FBH reduced its footprint by 6.1%, a deliberate strategy to rationalise the footprint and improve trading densities. Turnover and concession sales increased 4.7% in comparable stores and inflation was 5.4%, so volumes declined. When taking into account the decrease in space, sales in this segment only increased by 4.2%.

The good news story in FBH is that gross margins increased by 40bps to 46.3%, as the group focused on full-price sales. I’m starting to wonder if there is a rebellion being staged against Black Friday by listed clothing retailers, as the narrative over this trading period has been similar in other companies as well.

Woolworths Food, a business that has played a key role in preventing higher emigration from South Africa, could only grow turnover by 3.8% over the full period and 5.8% in the last six weeks. Compared to the same period in 2019, sales have grown by a total of 15.2%.

Underlying product inflation was 3.7% and price movement was 2.6%, which means Woolworths is having to suck up some cost pressures. This comes through in gross margin, which fell 70 basis points to 24.1%.

Expenses grew 6.3%, driven by investment in online capabilities and higher energy costs. This is higher than revenue growth, so adjusted operating profit fell by 8%.

David Jones may have returned cash to Woolworths but sales went in the wrong direction, down 9.2% for the full period but up 3.2% in the final six weeks (and up 7.7% adjusting for the shift in Boxing Day sales). Trading space was reduced by 5.8%. Adjusted operating profit fell substantially, down 44.6% on the prior period.

Country Road saw its sales drop 3.1% over the period. They were up 1.7% in the last six weeks. Trading space decreased by 7.4% and adjusted operating profit fell by 48.9%, a horrible result reflecting the lockdowns in Australia.

Woolworths will be very happy to see the back of this period. Covid lockdowns are hopefully a thing of the past, not least of all because the world has much bigger problems right now.

Online clearly remains a substantial growth area and trading space rationalisation is likely to continue. The key line to watch is gross profit, as a higher proportion of online sales can put pressure on margins.