Johannesburg - South Africa's major retailers are not only heading for a bleak Christmas, but their profits could also come under severe pressure if the country's retail sales decline does not improve.
This is the view of analysts after data released by Statistics SA on Wednesday showed October's retail sales declined by 6.5% at constant prices, year-on-year, after a revised contraction of 4.9% in September.
Warren Buys, portfolio manager at Cadiz Asset Management, said retailers which may have averted the worst of the shrinking numbers through cost-cutting measures were starting to run out of options.
"I believe they have cut controllable costs to the bone already," said Buys. "If we don't see a pickup in volumes soon, profits will come under pressure."
Said Buys: "I believe we're going to experience a more protracted economic recovery, and we should see this in more muted growth in retail sector earnings."
Evan Walker, retail analyst at RMB Asset Management, said the year had been difficult for the retail sector but well handled by listed players, of which some maintained earnings while others reported growth.
Commenting on the data, Standard Bank economists said the worse-than-expected figures pointed to a dull Christmas for the retail industry.
For many retailers, Christmas sales make up the bulk of their annual income.
"Unfortunately, the reality is that the consumer base weakened more considerably in recent months owing to a steeper rate of job losses, while year-end bonus payments will be weighed by the poor economic performance this year," Standard Bank said.
"This will provide for a dull Christmas period for most retailers, with non-durable and semi-durable goods sales volumes slightly lower than a year ago."
Credit can't compete with cash
Credit-orientated retailers stood to be the hardest hit as consumers tend to favour cash during the festive season, the bank added.
The bank said data indicated that the retail environment was showing no signs of improvement, which may well be a forerunner of a subdued festive season.
Nedbank said the October numbers showed that consumer spending remains under severe pressure, but expressed hopes that the normal seasonal effect will contain the rate of decline in retail sales in the last quarter of 2009.
"Despite the poor number in October, November and December could surprise on the upside [due to the seasonal factors], which would boost sales for the quarter," said Nedbank economist Johannes Khosa.
"The manufacturing sector, another key sector of the economy, is also showing signs of improvement, which could partly offset the effect of weaker retail sales. Overall, we expect gross domestic product growth of 0.9% in the fourth quarter of this year."
Khosa said this year's retail sales were weak; the 5% fall compared with the first 10 months of 2008 was an indication of the downturn's effect.
"Despite aggressive interest rate cuts, consumer confidence was depressed by tight lending criteria and worries about job security," he said.
A slow recovery was expected in 2010 as consumer confidence builds up with a gradual uptick in the economy.
Nedbank said the latest FNB/BER Consumer Confidence Index, which surveys consumer attitudes and expectations, showed the level of confidence has already increased by 5 index points to 6 in the fourth quarter.
This upward trend was expected to be sustained by low interest rates, inflation and some stability in the job market. The 2010 Fifa World Cup was also expected to fuel growth next year.
- Fin24.com