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Retailers take a beating amid tight trade

| Economic factors

Local retailers' share prices took a beating on Friday after Woolworths reported a decline in its sales with consumers discretionary spending under pressure.

The eleven-member FTSE/JSE Africa general retailers index retreated 4.8 percent, heading for the lowest level since April 23.

Damon Buss, an equity analyst at Electus Fund Managers, said it was a bit of a bloodbath for the retailers on Friday.

“The key reason being is that we have had some very poor like-for-like trading numbers released in the last week or so, especially in the local apparel sector where the retailers have had to push through significant price increases (in most cases more than 10 percent), due to the weakness of the rand earlier in the year,” Buss said.

Alec Abraham, an equity analyst at Sasfin Securities, said: “As inflation rises, we are seeing South African retail coming to a grinding halt.

“Even the wealthier consumers are now feeling it.”

Woolworths, which bought Australian department store chain David Jones two years ago, reported a decline in its sales. Its shares hit a 19-month low in early trading tumbling more than 5 percent, but recovered to close at R67.81, down 3.54 percent on the day.

“The start to the financial year in both South Africa and Australia was impacted by an extremely warm winter and consequently very high levels of promotion, as all retailers sought to clear stock,” Woolworths said in a statement.

Woolworths said its clothing and general merchandise division experienced a 0.8 percent decline in comparable store sales. But Woolworths was not the only retailer that took a beating on Friday.

Mr Price lost 7.15 percent to R133.70 and The Foschini Group (TFG) was down 2.95 percent to R126.17 on Friday.

Buss said the combination of these high price increases and substantial discounting, predominantly by the foreign apparel retailers and Edcon, had an extremely negative effect on like-for-like volumes being reported.

For example, Woolworths clothing and general merchandise was minus 7.8 percent for the first 19 weeks of financial 2017, with TFG Africa minus 6.9 percent and Truworths South Africa minus 21 percent for first 18 weeks of financial 2017.

Mr Price would only report on Monday so the market was clearly preparing for a poor set of numbers, Buss said.

Mr Price group warned two months ago that first-half earnings would probably decline as it experienced the weakest winter season in more than a decade.

Discretionary spending is under pressure from unemployment of 27 percent, the slowest economic growth since 2009 and rising interest rates.

Inflation has been above 6 percent most of this year.

Buss said: “Over the last few years these retailers have traded on relatively high multiples, as they have been able to consistently deliver growth in headline earnings per share.

“Given the tough environment, these initial indications show that they are struggling to deliver growth, the market is now de-rating them.

“Another reason that these retailers are struggling is because bond rates have moved out, which means that there is a higher risk of interest rate increases, which negatively impacts affordability for consumers.

“The rand has also weakened, hence price inflation is likely to be higher going forward than what the market was expecting,” he said.

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