Several JSE-listed clothing retailers enjoyed a relatively strong festive season, but while trade was better than expected, analysts warn this does not mean a broader retail recovery in SA is in the offing.
Not only are rising interest rates looming but the economy is struggling, with few of the jobs lost during the pandemic being recovered.
For its third quarter and the nine months ended December 2021, Foschini owner TFG reported that its TFG Africa division, which includes all its South African business, reported retail turnover growth of 17.3% in the third quarter compared with 13.9% in the same period the previous year. It said December “pleasingly exceeded expectation with growth of 23% compared to December 2020”.
Mr Price reported strong growth during its third quarter, from October 3 to January 1 2022, reporting that retail sales and other income increased 19.2% to R9.3bn. This included the recently acquired Power Fashion and Yuppiechef businesses, excluding which it grew 7.2% to R8.3bn.
But others had a more muted performance.
At Pepkor in the quarter ended December 31 revenue increased 1.3% to R22.8bn due to “the strong base in the comparable quarter in the previous financial year and 161 looted stores that had not yet reopened at the start of the quarter following the civil unrest in KwaZulu-Natal and Gauteng during July 2021”.
Pepkor said though trading was “weak” in October it normalised in November and “strengthened” in December”, and the “improved trajectory is very encouraging” in the face of a weak economy and “record high levels of unemployment”.
As a result it believed the “discount and value retail segment will continue to perform well” and “continue to focus on offering our customers the best possible price”.
However, Pepkor was “concerned” its customers were “under increasing pressure” due in part to the weak economy, long-term effects of the pandemic and the higher levels of inflation expected.
Truworths, for the 26 weeks ended December 26, said Truworths Africa, which excludes its UK business called Office and comprising mainly of the businesses in SA, reported a muted increase of 1.4% to R7.4bn in retail sales compared with the prior period.
However, even in the “midst of ongoing challenging trading conditions” the group estimates its headline earnings a share for the current period will increase between 29% and 34% compared with the prior period.
For the 26 weeks ended December 26, Woolworths’ fashion, beauty and home division in SA grew turnover and concession sales by 4.2% and 4.7% respectively in comparable stores, with price movement of 5.4%. However, it said “trading momentum slowed in the last six weeks of the period, primarily due to womenswear performing below expectations”.
If you look at all the credit stats that have come out they are not nearly as bad as one would have expected. The banks and retailers such as Truworths are in a good position in that the very generous provisions they made last year in case of bad debts, they can release now in their earnings
— Sasfin Wealth senior equity analyst Alec Abraham
All Weather Capital fund manager Chris Reddy said that “in general, the trading updates haven’t been as bad as some would have expected given the tough macro environment, although there are some nuances in the period that need to be factored in, such as the delayed school start in 2021 and stricter lockdowns in Australia and the UK for example”.
Reddy said the relatively strong growth was also due to “people not being able to travel as much during the period and having spent a bit more time in the malls and on discretionary expenditure”.
Casparus Treurnicht, research analyst and portfolio manager at Gryphon Asset Management, said last year people were hesitant to travel locally, never mind abroad, but that travel bans late last year in some way redirected “spending from overseas travel to local consumption”.
Sasfin Wealth senior equity analyst Alec Abraham said the trading updates were “relatively solid” considering the macro-economic circumstances.
“They’ve all focused on working capital management and keeping their stocks low because they are not sure how much they can sell. And frankly, I don’t think they were understocked, I think the consumer is weak.”
Analysts expect affordably priced value retail to fare better this year than the top end.
Treurnicht said the “recent trading outcomes” highlighted “that the value segment is where most of the action will happen over 2022”. He said it was hard to see how the “upper segment will ever retake market share as our country continues to underperform”.
Over the medium term the outlook for retail was “not that positive”, with consumer spending in SA likely to “muddle along” .
Treurnicht’s top picks were Pepkor and Mr Price, while he believes Woolworths may still be an underperformer as it tries turning around its fashion, beauty and home division.
Protea Capital Management analyst Richard Cheesman said the value end of the market and retailers such as Pepkor and Mr Price were positioned well, as was the case in 2021.
Mr Price and TFG appeared to be “winning” while Woolworths’ fashion, beauty and home division and Truworths were lagging a bit, he said.
Retail sales and other income at Mr Price in the third quarter of its financial year.
— IN NUMBERS: R9.3bn
But for Abraham the standout is Truworths: though its revenue growth was weak, the advantage it had was that its profit figures appeared to be a lot stronger “because they can release provisions they made for bad debt last year”.
“If you look at all the credit stats that have come out they are not nearly as bad as one would have expected. The banks and retailers such as Truworths are in a good position in that the very generous provisions they made last year in case of bad debts, they can release now in their earnings.”
Truworths said with “regards to our consumer base and in particular our account customers, they have weathered the storm and have proven to be resilient despite the economic impact of the pandemic and the resultant job losses. Our book is performing well and at favourable levels seen prior to the pandemic.”
Looking ahead, Abraham said the rising interest rate environment made “things worse” for an economy in which there was barely growth and many jobs had been lost.
He expected discretionary spending on clothing to suffer, with consumers looking to the value segment when they do spend.
Reddy says All Weather preferred retailers that offered better value than their peers and these included TFG and Truworths.
He said another trend he was “watching carefully” among retailers was the “percentage of full-price sales” to “help margins while not giving up too much market share”.
Matt Warriner, investor relations director at Mr Price Group, said the group “strategically chose not to partake in the high level of promotional activity” and instead trusted its every-day low price model to “deliver value to customers and preserve margins.
Warriner said the group was “satisfied” with the festive period performance and was “well placed to continue building” on its market share gains.
Truworths also said customer demand for “aspirational high fashion continues to show good resilience on full price in demand merchandise”.
Woolworths Group CEO Roy Bagattini said the group’s “biggest opportunity — certainly over the near term — lies in improving the underlying financial health of our fashion business, which, to be candid, has been disappointing for too long”.
“Our sales performance over this past six-month period is reflective of some of our repositioning initiatives. We’ve reduced our footprint by 6% and we’ve reduced our product intake, so while we’re selling less, it’s of a higher quality, and that’s translating into a stronger contribution from full-priced sales than we’ve seen in years and double-digit growth in our trading densities.”
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