It’s the nightmare before Christmas. SA’s retailers — many of which have put out awful trading updates — are gearing up for what looks to be a dreadful festive trading season.
The ability and willingness of consumers to spend has tapered off this year, with higher taxes and interest rates, weak growth in real disposable incomes and muted rates of credit depressing consumer confidence.
In the year to date, the general retailers index is down 17.8%, with clothing, furniture and household equipment retailers experiencing meaningful volume declines. Food retailers have fared better, with volumes holding up or showing small declines, says Sasfin Securities senior equity analyst, Alec Abraham.
On the positive side, there appears to be a buying opportunity now that retail shares have been sold down aggressively.
Says Abraham: "One could argue they appear relatively cheap, though one must consider whether or not historic p:e levels are still relevant in a retail market that now includes foreign players and has arguably undergone significant structural change in the competitive landscape."
In the year to date, Woolworths shares are down 32%, Mr Price 31% and Truworths 25%, with Pick n Pay down only 2%. Meanwhile, Shoprite is up 32%, The Foschini Group (TFG) 11% and Massmart 9%.
On the whole, sales are down across the retailer sector, but the apparel side has been particularly affected.
Sales at Truworths were down 1% in its first 18 trading weeks of financial 2017. And TFG reported only a 5.7% increase in earnings for the six months to September, compared with the previous year’s 16.6% rise. Both players,traditionally "credit" retailers, have come under severe pressure as new regulations make it more difficult for shoppers to access credit.
Paul Sirani, chief market analyst at Xtrade, says SA’s retail industry is in trouble. "Consumers have become increasingly indebted, leaving them little spending power, while major outlets have been put under stricter credit regulations," he says. "The recent slowdown may persuade the National Credit Regulator to hear retailers pleading for a return to looser consumer credit-vetting regulations, but a balance has to be struck between protecting the consumer and keeping tills ringing."
The rate of credit extension to households has moderated steadily to a muted 1.2% year on year, from the double-digit rates prior to the 2008/2009 recession, according to research from Investec.
Cash-based operators haven’t fared much better . Mr Price Group, once the darling of the retail sector, reported a 0.5% decline in apparel sales to R5.1bn in the 26 weeks to October.
Even Woolworths, which is usually shielded by its well-off consumer base, says sales in its clothing and general merchandise division increased just 2%.
Simon Anderssen, Kagiso Asset Management’s associate portfolio manager, says this is one of the sharpest retail slowdowns in years — which doesn’t bode well for Christmas sales.
"Over the next six months, sales growth for retailers will likely remain below their rate of operating expense inflation. Added to this, a weaker rand and increased competition are likely to compound the negative effect."
Updates from other retailers didn’t shoot the lights out either. Massmart — which sells everything from yoghurt to drills — reported a 5.3% rise in sales for the 44 weeks to October 30. And Lewis Group’s like-for-like sales fell 9% in the six months to end-September.
Abraham says further downside pressure and price volatility cannot be ruled out, asmyriad factors could drive these movements. These include SA’s potential ratings downgrade, macroeconomic data, political movements and how US president-elect Donald Trump’s policies may affect emerging markets. "A further source of volatility and possible sell-off is the fact that foreign ownership of the retail counters is high, and a possible interest rate rise in the US in the short term could spark a sell-off as foreigners repatriate funds," says Abraham.
In addition to unprecedented promotional activity, another trend is driving up competition in the apparel category. Consumers, who for the better part of the past decade obtained easy credit through store cards, now have cheaper cash-based options such as Cotton On and H&M gaining favour.
Damon Buss, equity analyst at Electus Fund Managers, says aggressive price discounting from international fashion retailers has also hurt local sellers. In addition, affordability regulations have stifled new credit accounts.
"Both food and apparel retailers’ p:es have derated significantly and consensus earnings forecasts have been downgraded. This combination of low multiples on a low earnings base creates a good entry point for long-term investors. We are expecting the key December sales period to be very tough for the retailers and hence the trading updates in early 2017 are likely to disappoint."
Retail sales growth lifted to 1.4% year-on-year in September, from no growth in the previous month, according to data from Statistics SA.
Abraham says that in light of this trend, Christmas sales will be poor for all retailers, but particularly for those in the furniture and clothing sectors, as consumers redirect spending to basics such as food.
Still, analysts believe there is value — if you look at the right retailer.
The top pick is TFG. Of the 15 Bloomberg analysts who rate the share, 10 have it as a buy and five as a hold. Their average target price for TFG over 12 months is R158.62 — more than 10% above its current level of R143.
Woolworths has nine buys, five holds and two sells and is expected to trade at around R92.22 in a year’s time. That is also considerably above its current price of R67.57.
Analysts are on the fence about Mr Price — most have it as a hold, and it has three buys and three sells.
The least favoured is Truworths: seven analysts rate it a sell, compared to four "buys". Truworths’ average target price is R78,59, not far above its current level of R72.77.