Retailers falter as resources pick up
RETAIL stocks are bearing the brunt of a steady recovery in the resource industry as investors are shifting away from businesses that rely on consumers to companies that appear more likely to offer higher rewards.
Typically during times of economic uncertainty, retailers are left as the last men standing as other sectors fumble their way through. But as the resources sector gains momentum, it seems retailers are stumbling.
From April 2007, as concerns over the credit crisis set in, the general retail index, comprising the top listed non-food retail stocks, halved to reach a level of 1 911 in June 2008. Between then and June last year, it increased by 350% to 8 567 as consumer credit extension buoyed sales.
Since then it has declined 12.3% to reach 7 515 at the market close on Friday.
The decline is the result of concern about the lack of consumer credit following increasing legislation restricting credit growth — particularly the new affordability regulations that came into effect on September 14 last year.
Kaeleen Brown, an analyst at SBG Securities, said the reversal of flows was a combination of many factors.
“People are concerned about the South African economy. It has been hit by the rand weakening, and the impact of interest rates rising and high unemployment means that consumers have less cash in their pockets,” she said.
Brown, the only analyst to raise Pick n Pay stock from “sell” to “hold”, said the company would likely experience a continuous scaled growth in its clothing business, which has “higher margins than the food business, which, together with the growth of its financial services business, will provide more opportunities to drive profitability. If you look at supermarket group Asda in the UK, for example, it sells food for nothing. It makes no money off food and hopes that its customers buy either general merchandise or clothing — that’s where it gets its margins from.
“What the clothing retailers have done over the past 18 months to two years is acquire business offshore, and the market has taken that as a signal that they are seeing the South African market as largely ex-growth.”
In the past two years, South African retailers have been trailblazers in acquiring offshore businesses, the most notable of these being the acquisition of David Jones by Woolworths and Spar buying into Spar Switzerland.
Rod Salmon, equity analyst with Barclays Capital, said the acquisitions might be an indication that retailers think South Africa has reached saturation point or growth is going to be slow, and so they are moving into new geographies to find earnings growth elsewhere.
When things got tough, people usually shied away from discretionary spending and instead spent mostly at food retailers, said Salmon.
“People are particularly scared of the credit retailers, potentially because of the impact of the affordability legislation.”
Salmon said food retailers on the JSE were up on average 14.3% so far this year, while the general retail index was down 5.7%.
Stefan Salzer, MD of the Boston Consulting Group, said the numbers coming out of the retail sector this week “are not that promising”.
Shoprite’s like-for-like growth “didn’t show promising results, so you could argue that as an investor you’ve had the biggie in the market struggling but also had the former biggie, Pick n Pay, lead a nice turnaround”, said Salzer.
“All the grocery retailers are going in with aggressive promotional pricing, which means that while you and I are in a market paying in 6% inflation, if you look at pure food inflation in the large grocery chains, then that is actually below the inflation rate.”
Despite the bleak outlook, Salzer said, South African consumers were “pleasantly optimistic”, which resulted in a fragmented picture of the industry.
If you analyse consumers by income, however, the top earners are slightly more optimistic than those at the lower end of the spectrum.
“If you look at people earning around R6 200 a month — which is a significant chunk of the population — for that segment, optimism has come down 13 percentage points from 76% to 63% for the current year,” said Salzer.
However, Brown warned that investors were right to be cautious on consumer stocks.
“I have downgraded stocks in the last month over concerns that things are going to get tougher before they get easier,” she said.