The shares of listed retailers have been volatile this year, ranging from -13% at the low end to more than 100% at the top end. The sector used to be regarded as glamorous and constituent companies regularly posted earnings and dividend growth in excess of 20% per year and enjoyed highly rarefied valuations.
But that’s changed now and rarely do companies exhibit such strong earnings growth. However, many of them still retain extremely elevated valuations. The only explanation for this is that the market is anticipating a return to sustained strong earnings and dividend growth and is prepared to wait for it. It may be a long time in coming.
Dis-Chem shares have risen the most in the food and drug retailers category, rising by 68% year to date, closely followed by Shoprite, with a share price movement of 53%. Clicks has risen by 20%, while Pick n Pay has been virtually static at 4% and Spar went backwards to the tune of 13%. The Dis-Chem share price movement seems unwarranted, as Dis-Chem’s headline earnings per share growth performance since 2017 has been poor, averaging only 1% per year compounded. It is now rated on a highly rarefied 39 times price/earnings ratio.
Shoprite has managed to exhibit some strong sustainable revenue and earnings growth but, even here, a 53% rise in the share price is discounting really good news in future. Clicks’ fundamental performance this year was predictably ponderous but the market has grown accustomed to this and has rewarded the share price accordingly. Pick n Pay managed to disappoint again with it and Shoprite now valued on the same price/earnings ratio of 21 times. Spar’s share price went backwards amid concerns over its recently-acquired Polish business.
There are three listed clothing retailers: Mr Price, Truworths and TFG. Mr Price rose by 17% this year, TFG by 22% and Truworths 40%. Truworths is by far the most lowly rated and has the worst metrics of all three.
But its price/earnings ratio is an undemanding 10 times, which is probably why the market believes there is upside potential in terms of a rerating. Both Mr Price and TFG have made clever strategic acquisitions in 2020 and 2021, and trade predominantly at the lower end of the market compared with Truworths’s more upmarket positioning. Low end is where you want to be in the languishing SA economy.
Then there’s Woolworths, which got itself into all sorts of problems in Australia over the years. Nevertheless, the market believed that it would sort these out earlier this year as the share price broke convincingly through the R60 barrier. Since then, however, reality has sunk in and it has become clear that the only real value in this business lies in Woolworths Foods. The share price is up by 31% year to date.
The only listed furniture retailer, Lewis, had a phenomenal year, with its share price rising by 107%. Its fundamental performance has been excellent and not just predicated on the so-called “homebody economy” that has sprung up with the onset of the pandemic. Once again, the market may have got ahead of itself with this price rise, though it should be pointed out that even after a doubling in share price, the price/earnings ratio is still a low 6.7 times.
Cashbuild, an independent DIY retailer, saw its shares surge earlier this year but since then they have settled down to a fairly pedestrian 12% growth. Like Lewis, the PE ratio is low, at 9 times.
This just leaves retail conglomerates Massmart and Pepkor. Massmart is up 37% this year and is still languishing. It released a truly dreadful trading update recently that left many observers wondering when this company will ever come right. The Pepkor share price is up by more than 62% this year.
Calendar 2022 is likely to be tough for most retailers but, hopefully, share price performance will be more closely aligned with fundamental performance.
• Gilmour is an independent investment analyst with Salmour Research.
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