JD Group be­comes hope­ful

Worst could be over for re­tail shares

Finweek English Edition - - Property Compass - LU­CAS DE LANGE

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.)

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