If Woolies is trapped in economy’s pincer, then all other retailers are likely to struggle
The eagerly awaited unveiling of Finance Minister Malusi Gigaba’s action plan finally took place. To refer to it as disappointing is a grave understatement. His strategy will probably do little, if anything, to allay the concerns of the ratings agencies.
Gigaba concentrated on timelines to which he can theoretically be held to account, but absolutely nothing new emerged that could conceivably change the dismal course of the South African economy. The consumer economy is cooling rapidly and urgently needs a kick-start if we are to avoid a prolonged recession. Particularly unacceptable was his assertion that “there is no growth target for this action plan”.
How fitting, then, that Woolworths released its trading statement for the year to June 2017 on the same day as Gigaba’s announcement.
Woolies is a world-class business and if it were operating in the developed world, it would be pumping. But it’s not. This was a poor update, in similar vein to its pedestrian performance during the interim period to December 2016.
In SA, after stripping out the effect of new store space and inflation, real comparable clothing and general merchandise sales went backwards significantly. At least management didn’t blame the weather this time. Comparable food sales, which for years have been the mainstay of Woolies, rose 4.6% but food inflation averaged a whopping 8.4%, meaning that, in inflation-adjusted terms, even food sales declined.
In Australia, even though David Jones and Country Road eked out some marginal market share gains, the brands went backwards in terms of comparable sales growth.
Full-year headline earnings per share growth, which excludes the profit on the disposal of David Jones’s Market Street property in Sydney, Australia, is expected to decline 5% to 10%.
Woolies now appears to be caught in a pincer situation. The South African economy is expected to languish for some time and one cannot assume its exquisite but very expensive food offerings will be immune to macroeconomic headwinds.
South African clothing and general merchandise are struggling and the competition is constantly increasing, especially with some aggressive entrants to the market, in the shape of H&M, for example.
The Australian situation appears to be deteriorating. While that country has avoided recession since 1991 and the outlook is for sustained economic growth in 2017 and 2018, its household debt to disposable income ratio is approaching 200%. The property market appears to be in bubble territory and should this burst, Australian discretionary spending will surely collapse.
This trading update, coupled with the extremely poor outlook for consumer spending in SA over the next few years, sounds alarm bells.
Over the past 18 months, the company’s share price has fallen 40% to about R60 and it is unclear what the catalyst might be for a return to the heady days of 20%-plus earnings growth.
For some time, foreign investors have been the main buyers of South African retail stocks, Woolies included. Local fund managers have been far more introspective with this cyclical sector and many have avoided it in recent years.
Woolies and Mr Price were probably the most prominent retail stocks in local portfolios. That changed in 2017 with Mr Price’s spectacular fall from grace and no clear indication that the downward momentum has changed.
Woolies was therefore probably the “last man standing” as far as retail exposure in portfolios was concerned.
Gigaba’s grand plan gives no hope for any noticeable improvement in consumer spending in the foreseeable future. Far from attempting to get to 6% economic growth, this latest pronouncement stays with the official forecast of a miserable 1.3% — and even that may be difficult to achieve. Against such a background, retailers are bound to struggle.