Rate hike 'may kill economy'

The updates showed a contraction in same-store sales when the effects of inflation are stripped out, with analysts observing that another interest-rate increase could seriously stunt the economy.

"The interest rate increase in December was overdoing it," said Abri du Plessis, chief investment officer at Gryphon Asset Management. "If the Reserve Bank chooses to increase the repo rate again in February, it will kill the economy."

Woolworths said that for the 26 weeks (or six months) to December 23, 2007, sales in its clothing and general merchandise category were up 7.3% in total, and 4.3% at comparable stores when compared with the same period in 2006. However, the average inflation rate of 9.6% means that comparable sales contracted by 5.3%.

The food division showed that fewer goods were leaving stores - while sales grew by 18.8% overall and by 9.7% in comparable stores, an average inflation rate of 12.1% meant that sales at existing stores contracted by 2.4%. This is the second consecutive quarter of contraction in Woolworths' food division, with a 1% contraction reported comparable store sales in the 21 weeks to November 18.

At Mr Price Holdings, sales grew by 14.6% overall for the three months to end-December, the company's third quarter, but same-store sales rose by 5.2%. With inflation of 8.4%, real same-store sales contracted by 3.2%. Same store excludes new stores that may have been opened during the period under review.

In its home division - which comprises Mr Price Home and Sheet Street - same-store sales shrank by 2,2%. Mr Price said this reflected "the continued impact of larger format stores in close proximity to smaller established stores" and the effect "of interest-rate, fuel- and food-price increases on consumers who have reduced spending on home-related products".

Du Plessis said the overriding message from the trading updates is that consumers are under pressure, and face more pressure going forward.

"Killing the economy"

Absa Asset Management Private Clients analyst Chris Gilmour also said retail sales figures suggested the economy could stall if consumers were subjected to another rate hike. Recent interest-rate increases are "killing this consumer economy. We are dealing with a consumer recession," Gilmour said.

The monetary policy committee has increased the repo rate by 50 basis points nine consecutive times since June 2006, taking the repo rate to 11%, and the prime-lending rate to 14.5%.

Trading down

Gilmour said Woolworths has been able to capture a large chunk of the aspirant black consumer market, and that the figures released on Thursday showed that this sector of the consumer market "may be starting to feel the pinch" and that it was "showing signs of being over-extended".

Du Plessis says that Woolworths' rapid expansion of its food-store footprint was a good decision as food retail does better than other forms of retail in difficult economic times. He added, though, that consumers are "buying down", opting for cheaper products in categories, which would benefit Shoprite.

At 11:30, Woolworths shares were trading 2.9% lower 1 402c. Mr Price shares were down 0.25% at 1 975c.

- Fin24