JD Group becomes hopeful
Worst could be over for retail shares
AWELL KNOWN technique to try and find winners in the midst of the negative hubbub of a severe bear market is to look for those shares – on the basis of relative strength* – where the so-called smart money is buying. Because, though such buyers never advertise their activities for all to see, their buying nevertheless casts a shadow in that a share performs stronger than the market as a whole or a specific sector.
A good example is Shoprite, which has been performing better than the all-share index since 2002. Even in the period when commodity shares pushed the index up so much it enjoyed enough support from the “smart money” to sustain the upward trend. Its recent figures again came up to expectations: trading profit up by 44% to R2,3bn, turnover by 22% to R47,7bn and diluted headline earnings by 54% to 299c. And then shareholders’ hearts were gladdened by a 61% increase in the final dividend to 106c.
In a trading update issued since, it was stated that sales increased by 26% in the three months to September and its market share in SA increased by 1,5%. Sales in stores outside SA were up by 45% over the three months, partly a function of the weakening rand.
However, a broader picture has begun to emerge if retail shares are looked at on the basis of relative strength. Mr Price is one that stands out. The long downward cycle it followed since the beginning of 2007 ended in July and a strong upward trend is noticeable (partly attributable to the tumble of resources shares that had such a marked impact on the all-share index). Again, its positive relative strength is confirmed by good results in the midst of all the woes surrounding consumer spending.
Sales at Mr Price increased by 19% to R3,9bn, clearly supported by clients attracted away from more expensive shopping groups, such as Woolworths, by lower cash prices. The profit was negatively affected by higher tax, which was partly due to non-recurring factors. Nevertheless, its operating profit was up by 15%, diluted headline earnings by 11% and its interim dividend by 10%.
It’s clear from the Mr Price group’s report that the downturn in consumer spending is being aggressively managed. For example, 66 new shops were opened over the past year and 750 new jobs were created. The clothing chains in particular accounted for that profit. The strong pressure on the consumer was clearly evident in the chains selling semidurable goods, such as Mr Price Home (household goods) and Sheet Street (drapery).
Chairman Stewart Cohen says 84% of the group’s sales are in cash, so cash flow is strong. Historically the group has fared better in conditions such as now than those chains that sell on credit. “We feel quite comfortable in these times,” Cohen says.
A retail leader investors looked at askance last week was David Sussman, CEO of JD Group, SA’s largest furniture retailer. He said the retail cycle’s current downward leg has reached its lowest point and that “exciting” signs of an improvement are noticeable. Two years ago – when he warned the upward leg had reached its peak – people were also sceptical. Sussman has survived a number of cycles and says one of the most important indicators is that bad debt is falling. In the three months to August there has been a marked fall of 15% and that trend has continued since. The middle market consumer’s finances are improving, he says.
JD Group is one of those retailers that for various reasons suffered badly from the downturn in consumer spending. The result is that in the year to August profit tumbled to R514m, compared with R1,1bn in the preceding financial year. Its share price fell by nearly 80%.
Sussman predicts an improvement in profit in its current financial year.
Interestingly, JD Group’s Polish interests are doing well, and Sussman says the business in that country is expanding in an economy showing good growth. Also notice the double bottom formed by JD Group’s price graph: that often represents a reliable turnaround formation.
A trend, therefore, seems to be emerging among retailers indicating that the worst is apparently over and that recovery – hopefully helped along by early interest rate cuts – rather than further pain can be expected. (See story on p.31.)