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With the South African economy forecast to grow at 0%, retailers are finding it hard to make profits, says Overberg Asset Management analyst Kirk Swart, who looks at local retail shares in this week's five shares to watch.
Cape Town -Local retailers, who normally trade on lofted multiples, have been feeling the economic slowdown, interest rate increases and increasing inflation. To pass the inflation onto customers is becoming harder as retailers are forced to lower prices to retain market share.
Clothing retailers are
feeling the economic slowdown as customers are withholding buying any unneeded
clothing items. Food retailers have fared a bit better with food being a
necessity which cannot be postponed.
Mr. Price released a trading update for the 18 weeks ending August 2016. It reported a 2.4% drop in comparable retail sales. MRP Apparel saw sales down 3.6% and Milady's saw sales down 12.3%. Mr Price cites an unseasonably warm winter and the weak exchange rate as the reason for the poor numbers.
Mr Price gives an indication of the state of the South African consumer. It cites “There has been a fundamental shift in consumer spending in South Africa, with higher unemployment and low economic growth significantly dampening consumer confidence and spending.” This indicates that unless economic growth starts picking up, clothing retailers like Mr Price will continue to struggle.
2. Foschini Group [JSE:TFG]
The Foschini Group is another South African retailer that is exposed to the stagnating economy. Although it reported a good set of results for the year ending March 2016, with headline earnings per share up 17.6%, the unseasonably warm winter would have had an impact on the Foschini group as well.
After the poor Mr Price trading update, the Foschini Group share price de-rated. It fell from R160 to around R126, a drop of 25%. Investors are cautious that the Foschini Group will suffer a similar fate as Mr Price.
3. Woolworths [JSE:WHL]
Woolworths is a South African and Australian retailer which has a broader product offering than Mr Price and Foschini. Woolworths are also in food sales. In their recent results they indicated that the local clothing business slowed down in the second half 2016.
Woolworths highlights that it may see lower margins going forward as it needs to compete on price. The South African food division is experiencing single digit margins and are trying to be more price competitive as well.
Woolworths Australia, which contributes around 41% of the group operating profit, had a tough time with the Country Road division. Country Road Women’s Wear has undergone a number of changes.
Woolworths will be rolling out its food division in Australia via David Jones. It is expecting that the David Jones food division will run at a loss of A$5m – A$10m in 2017 and 2018.
4. Shoprite [JSE:SHP]
Shoprite reported a more than decent set of results for the year ending June 2016. Diluted headline earnings per share increased by 17%. A lot of the growth was achieved outside of South Africa. Shoprite cites that the general state of the South African economy is placing a damper on consumer spending.
Where Woolworths are trying to compete on price in their food division, Shoprite is the leader in low pricing.
As with all the retailers, the Shoprite share price de-rated after the Mr Price results. It came down from R206 to R182, a drop of 11.65%.
5. Massmart [JSE:MSM]
Walmart’s South African subsidiary, Massmart reported its interim results for the 26 weeks ending 26 June 2016. Although overall revenue for the group was up 8.9% and headline earnings per share was up 19%, Massmart halved its interim dividend.
Nine new stores were opened. Excluding the new stores, the growth in sales was 6.4% of which 5.8% was price inflation.
The share price has fallen recently from R152 to R124. This is a drop of 18.42%.
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* Kirk Swart is an analyst at Overberg Asset Management , an Authorised Financial Services Provider (No 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.
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