SA consumers in 'world of pain'

Investors sold South African retail shares on Thursday after full-year results from the three shopping chains suggested a consumer rebound in SA was still far off while bad debts at Truworths exceeded expectations.

"It's pretty obvious that the consumer is in a world of pain," said Danie Pretorius, analyst at RMB Morgan Stanley.

Woolworths reported a 10% drop in full-year diluted headline EPS as its middle-class customer base was particularly hard hit by a string of interest rate hikes.

Turnover rose 15.5% but the company said it expected sales in real terms - stripping out the impact of inflation - to fall this year with no recovery for at least 12 months.

Woolworths has revamped its retail division and launched new women's clothing ranges, including a trendier fashion line. But it is more vulnerable to soaring food inflation than competitors such as fashion retailer Truworths, and less defensive that supermarkets like Pick 'n Pay.

Chief executive Simon Susman told Reuters Woolworths aimed to cap cost increases to 10% or less this year to help offset slower sales, and had put the brakes on store expansion.

However Susman said its Australian Country Road brand was performing well and would launch a more traditional chain of women's clothing in that country by this time next year.

Bad debts

Woolworths said bad debts rose to 7.9% of its debtors' book compared with 4.9% a year ago.

Truworths, the country's top fashion retailer, reported a 19% rise in full-year headline EPS late on Wednesday but its shares slid after it said bad debts rose to 11.3% of its debtor's book following 500 basis points of interest rate hikes since June 2006.

Like Woolworths, Truworths said business would remain tough in the short-term, despite last week's central bank decision to keep rates on hold. South African retail sales, once an engine of growth, fell 2% in June, the fourth monthly drop.

Low-cost retailer Massmart notched up the sector's best set of results so far, with a 23% rise in full-year headline EPS as it lured customers looking for cheaper products.

The retail index has slid almost 14% so far this year, lagging the all-share index which dropped 8%, as investors dumped stocks with exposure to the beleaguered consumer.

But some analysts believe the sector is oversold given that a burgeoning black middle class will ensure longer-term growth, and that even though inflation is rising, consumers are ultimately spending more.

"I think the market is too bearish on retailers," said Dean Ginsberg, analyst at Citigroup Investment Research, which rates Woolworths "buy". "Fundamentally there are more people in the system and in nominal terms they are spending more money. Wage inflation is good for retailers."

Headline earnings per share is South Africa's main profit gauge and strips out certain one-off, financial and non-trading items.

- Reuters