Credit sales weigh on some retailers
Pressure on consumer spending up
CHRISTMAS shopping is likely to be bleak considering the credit sales of leading clothing retailers, including Edcon Holdings, weighed heavily on earnings in the quarter to June.
The general retail index was up 1.88 percent at 7 925.50 points yesterday, down from a year high of 8 893.60 in April. Furniture retailer Lewis Group has declined 16 percent on the JSE since last year.
Local retail and clothing retailers that rely on credit sales in the lower income segment are likely to feel the squeeze as shoppers grapple with high levels of debt, a 25 percent unemployment rate and increasing power costs.
Analysts have warned discretionary spending would come under pressure because of the economic downturn and retailers would struggle even more to recover their debt in the medium to long term.
Chris Gilmour, an equity analyst at Absa Investment, said yesterday that fashion retailer Truworths, and furniture retailer, Lewis Group, had not changed their focus from credit to cash sales and would probably be susceptible to the slump.
“Truworths is vulnerable to the downturn given that it is a credit retailer. Furniture retailers like the JD Group and Lewis are vulnerable,” Gilmour said.
“Retailers that have no exposure to the rest of Africa will be vulnerable,” Gilmour said. He noted that Kenya and Zambia’s economies were growing substantially.
Gilmour said retailers, such as Shoprite Holdings – the continent’s largest food chain, had cashed in on the African market and planned to open almost twice as many stores this year to benefit from the strong economic growth.
“The guys that focus on the lower end of the spectrum will suffer because the economic environment has become tough,” he said.
Gilmour’s subdued outlook comes in the wake of consumer confidence plunging to a 14and-a-half-year low in the second quarter and the devastating drought that has raised fears of an imminent hike in food prices and inflation.
Jean Pierre Verster, an analyst at 36ONE Asset Management, said local retailers were under pressure and as a result, they were diversifying their businesses offshore with Woolworths opting for Australia, Foschini for the UK and Spar for Ireland.
“Ellerines and the JD Group, for example, are in demise because discretionary spending is under pressure. Also, a large portion of the furniture retail business is based on the sale of insurance, which is under scrutiny,” Verster said.
Insurance probe
Lewis has been accused of selling loss of employment and disability insurance policies to credit shoppers who did not qualify for the cover. The matter is being investigated by the National Credit Regulator following a tip-off.
Gilmour said retailers like Woolworths would be insulated from the economic volatility as they were more focused on the middle class. Woolworths’ Food division grew 14 percent in the half year to June, and about 40 percent of the company’s earnings are from overseas.
Mr Price Group’s fortunes are also expected to improve in the second half after its shares dropped by 13.25 percent on Tuesday on news of merchandising missteps.