Investec urged clients in a note on Wednesday to sell clothing retailers TFG, Mr Price, Woolworths and Truworths, removing its previous “hold” recommendation.
The financial services company thinks clothing retailers’ earnings will be lower than share prices suggest as SA’s consumers come under increasing pressure, which is forcing them to cut back on discretionary spending.
The note may have made some institutional shareholders skittish. On Wednesday, Mr Price fell 3.61% to R172.15, Truworths dropped 2.43% to R51.34 and Woolworths 2.39% to R62.96. TFG slumped the most in eight months, down 5.46% to R110.80.
In the note, Investec said growth in SA apparel retailers in financial years 2018 to 2022 had been driven by lower interest rates, which freed up cash for consumers, bargain acquisitions such as TFG’s purchase of Jet and lower rentals negotiated during Covid-19 when consumers avoided shopping malls.
TFG bought Jet for about R480m in 2020, with the stock worth almost the price it paid. Jet accounted for most of TFG’s 13% retail growth in SA in the 2021 financial year.
Its latest half-year earnings for SA have also been increased by its acquisition of Coricraft-owner Tapesty Home Brands and Dial-a Bed, suggesting it is seeing most growth from adding companies.
Investec calculates that growth in SA’s clothing retailers would have been flat due to the lower rentals, interest rates and bargain buys. “We calculate that the apparel sector earnings would have been flat from financial year 2018 to 2022,” it said.
The lower rentals that began during the lockdowns in malls are a thing of the past, it said, having spoken to retailers and property owners.
Flat growth
The note reads that the consensus market view is expecting the SA retail sector to have double-digit earnings growth in the 2023 and 2024 financial years.
“We, in contrast, think that flattish earnings growth for the apparel names is a far more likely outcome. We have cut our apparel forecasts accordingly.”
It also said SA is likely to be affected by “the slowing growth narrative we are seeing play out on the global stage”. Additionally, the rapid rise in interest rates in SA is “sucking oxygen” out of the room for consumer spending, and discretionary spend in particular.
“A strong consumer is a rear-view mirror story.”
SA has endured six consecutive interest-rate hikes with one more expected this year — raising the cost of mortgage, credit and car repayments. The weakening consumer in the year ahead is echoed by what various CEOs of consumer facing business have been telling the market in recent result presentations.
On the outlook for the 2023 financial year, Clicks CEO Bertina Engelbrecht said last week that trading conditions will remain extremely constrained.
“Consumer disposable income is under increasing pressure in the current low-growth, high-inflationary environment and this will be compounded by the trading disruption from ongoing load-shedding.”
Profit decreased
Famous Brands, owner of Wimpy, Turn ’n Tender and Debonairs, said on Wednesday of its outlook for its financial year ending in February, “SA consumers must contend with ongoing inflation, rising interest rates, load-shedding and political uncertainty.”
Investec pointed out that apparel retailer profit actually decreased in the financial years from 2016 to 2018 and it sees a similar situation in the near term, saying that “downside risks are mounting and a prudent approach is warranted”.
It issued a hold for Pepkor, a discount retailer with a lower share price in relation to expected earnings.
Despite the downgrades there are large differences between SA’s apparel retailers, with TFG being predominantly cash-based, while it has exposure in Australia and to the upmarket customer in the UK. Truworths relies on credit sales, and sells aspirational clothes, mainly in SA, with exposure in the UK.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.