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Tough year for retailers

The past year was one of the toughest on record for retailers, especially for those operating in the credit arena.

The severe effects of the recession heightened for retailers early in the year, with more consumers reining in on spending on discretionary goods and/or down-grading to less popular brands.

The SA Reserve Bank’s intervention – plus the dramatic repo rates cuts to 500 basis point by August 2009 in attempts to aid consumer spending – also didn’t help much.

In fact, retail sales growth declined throughout the year, reaching a 4.9% drop in December.

What distorted the conditions was the record jobs bloodbath that South Africa hadn’t seen in years, with almost 1m loosing their jobs, causing a strain in all sectors of the economy.

Short-shifting or long leaves were other measures companies employed in place of or in addition to lay-offs.

The knocks keep coming

“Conditions are tight,” captains of industries kept saying when delivering results throughout the year.

For credit retailers, in particular, the situation didn’t only mean consumer restraint but also tough collection times and more bad debt write-offs.

Unsurprisingly, furniture retailers took the hardest knock, with the JD Group leading the pack, largely owing to its high earning customer base, which is battling to repay heavy interest-bearing debts.

For example, in the year to August 2009 JD reported a 24% fall to R555m in profit before tax and a 23% increase in debtors’ cost to R1.1bn, while revenue was marginally up at 2.5% to R12.9bn.

Granted, the group was also on a restructuring exercise over the period, though its outcomes are still pending.

But rival Lewis Group – whose veteran CEO Alan Smart retired and passed the baton to COO Johan Enslin – faired well during the year, lifting revenue for the nine months to December by 7.9% and stabilising its debtors book.

A less complicated business, Lewis was also aided by its focus on the middle to lower end customer and its single brand strategy.

General retailer Massmart also came under pressure, primarily due to its significant exposure to the appliance and consumer electronics sector in its Massdiscounters subsidiary, which houses Game and Dion Wired.

“Those items are highly discretionary as far as consumer spending is concerned, which made them vulnerable to a downturn in consumer spending generally, as was the case last year,” says Absa Asset Management retail analyst Chris Gilmour.

In the year to end-June 2009 Massmart reported its African operations were also negatively impacted by the strong rand, resulting in a 4.3% decline in headline earnings per share.

But investors should look beyond the past year’s hardships: the group has a bright future.

CE Grant Pattison has committed the group to spend R760m in capital investment this year.

Half of that will be used to open new stores and its acquisitions of successful independent retailers, which last year saw Massmart acquire Port Elizabeth-based wholesaler Finro Cash & Carry.          

The shopping down trend also saw clothing and food retailer Woolworths Holdings, whose target market is high income earners, back a value strategy in basic foodstuff to help regain its lost market share to value retailers Shoprite and Spar, as embattled consumers opted for value instead of organic food.

Upgrading


Woolworths CE Simon Susman also sought a dramatic revamp of Woolies’ fashion division, resulting in a 26% sales up-tick in the 26 weeks to December 2009. 

But the darlings of this sector would be Mr Price and Truworths International.

While Foschini is still gradually getting its fashions right, its two competitors continue to please investors with their performances.

Over the period, Mr Price and Truworths reported market share increases, albeit at the expense of Foschini, unlisted Edcon and independent stores.

While Mr Price’s value for money strategy and its focus on cash sales rather than credit has certainly stood the test in all circles, analysts’ remain truly impressed with Truworths’ resilience.

Analysts’ say a combination of good management and the right fashions seem to be the recipe behind Truworths’ fortunes. 

It was an era of cost-cutting. “Undoubtedly, in a period when it’s difficult to grow the top line it’s imperative to cut costs – and the retailers did that very well,” says Gilmour.

“If anything, this year is likely to be even tougher than last year. Historically, the credit retailers should be reaping the benefits of lower interest rates but that hasn’t as yet materialised. It will probably only occur by second-half 2010. Meanwhile, they’ll have to bite the bullet and wait for consumer confidence to return. The defensive retailers – such as Spar, Clicks, Shoprite and Pick n Pay – should continue to outperform their more cyclical peers at least until that time.”
 

 - Finweek
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