Tailwinds have become headwinds for retailers
With consumers cutting back in response to a tough economic climate and high food inflation, retailers could not wait to see the back of 2016.
Barring some exceptions, such as Clicks and Shoprite, trading updates from retailers reveal dismal earnings.
Many retailers are fighting back by slashing prices to push volumes. This approach surely drives store traffic, getting merchandise off the shelves quickly. Still, it’s no real solution, as markdowns nibble on profit margins.
Clicks and TFG were two companies that pushed ahead despite the weakness in the market. “Clicks continues to perform well due to its relatively resilient business model. TFG also performed well due to its diversified operations,” notes Junaid Bray, head of equities at Argon Asset Management.
Health products retailer and pharmacy network Dis-Chem, which debuted on the JSE in November, is in good shape too. The company trades at R24 a share – slightly above the listing price of R23.36 – which puts its market cap at R20.8bn versus the R30bn boasted by rival Clicks.
“Dis-Chem looks outstanding. A new listing, it has significant growth potential,” notes Chris Gilmour, an investment analyst at Absa Investment & Wealth Management.
“Shoprite was the best of a bad bunch, with most of the clothing retailers going backwards in comparable, inflation-adjusted terms. Most trading updates were very pedestrian,” says Gilmour.
In its latest update Shoprite said turnover for the six months to December hit R71.3bn, a rise of 14% and, on a like-for-like basis, 8.6%. In this climate such growth, albeit far from the best from this retailer, is a tribute to a team led by Whitey Basson, who left in December after four decades with the company.
Bataung Capital managing director Tota Tsotsotso has only praise for Basson. “The timing of his African strategy was incredible, as Shoprite embarked on an expansion into some parts of the continent while most firms were still inwardly focused.”
Tsotsotso says Basson’s successor, Pieter Engelbrecht, who’s part of the Shoprite DNA, should ensure that continental expansion remains intact and that the group, in the throes of a tie-up with Steinhoff, lifts its operational efficiencies and profit contributions from outside South Africa.
Growth on the continent
Massive scope for revenue diversification remains for Engelbrecht – or whoever will lead the combined group – as Shoprite is still highly concentrated at home. Out of its almost 1 900 outlets, more than 1 500 are based in SA. It has presence in two West African states, where it operates 24 outlets. In East Africa its only presence is in Uganda.
In Nigeria and Ghana demand for formal retail is huge, according to a study by KPMG. Standard Bank estimates that Lagos – with a population of 17m (three times the size of Limpopo) – has less than 100 000m2 of formal retail space, while Ghanaian capital Accra has
55 000m2. For context, Sandton City’s retail side is a huge 130 000m2 and Durban’s Gateway boasts 120 000m2.
For its part, Pick n Pay has entered Ghana where it now competes with Shoprite and Massmart. Gilmour speaks highly of Pick n Pay’s Richard Brasher, who has stabilised the group from declining fortunes.
“Brasher has had an excellent four years. He has put Pick n Pay back on a solid and disciplined footing that was manifestly lacking before he arrived,” says Gilmour. Tsotsotso adds that, under the new CEO, management has stabilised operations, improved their offering and become price-competitive.
General retailer Massmart announced its sales growths declined during the last 44 weeks in 2016. “Although slowing marginally, food and liquor sales continued to perform well and Massbuild is showing signs of a sales recovery,” the company said in a Sens announcement. It said general merchandise sales remained “compromised by low consumer confidence, drought-affected food inflation and higher-priced imported products”.
For the full year, Massmart’s total sales climbed 7.7% to R91.2bn (or 5.4% on a comparable store sales basis).
Now at R132/share, Massmart has gained 40% over the past 12 months. However, it’s still far from the R205 a share it commanded in 2013.
Woolworths has advised the market that headline earnings per share (HEPS) will be lower by between 2.5% and 7.5% for the first half to end-December, to between 234.5c and 247.2c.
This compares poorly with the 30.6% growth in HEPS it reported for the 26 weeks to 27 December 2015.
Woolies’ share price has lost about a fifth of its value in the past 12 months, to R74 a share (way off the psychologically important R100 mark it was at 18 months ago).
Woolies and Mr Price used to be “darlings of the market”, recalls Bray, but the pair looks somewhat tired now.
During the third quarter to December, Mr Price – whose expansive footprint includes Nigeria, Kenya and the entire Southern Africa – reported a slight decline in total retail sales while Truworths’ latest trading update pointed to lowered HEPS.
“The tough environment has led to an increase in promotional activity, which negatively impacted profitability in the sector. This, coupled with stricter credit lending legislation, resulted in a challenging retail environment, with several retailers commenting that the current trading environment is amongst the toughest they have experienced,” explains Bray.
Tsotsotso feels that Woolies has had a tough task in Australia, a market that, like SA, is currently experiencing unfavourable trading conditions. David Jones, an Australian subsidiary since 2014, is yet to show its mettle and prove it was worth the R23bn that the JSE-listed outfit forked out. “Cracks emerged at David Jones, where expected profit enhancements from the deal are taking longer to materialise,” asserts Bray.
While there was “a slight pick-up in festive season sales numbers [...] most retailers reported fairly flat sales on a comparable store basis”, Bray adds.
Mr Price CEO Stuart Bird’s report gives the market a good idea of what the mood is at the top. “While we anticipated a more challenging environment this past year, we did not anticipate how severe some of the factors would be,” he wrote to investors last year.
While poor conditions persisted on the home front, heaving markets in Angola and Nigeria – where firms like Mr Price, Massmart, Pick n Pay and Shoprite have operations – faced a collapse in oil and resource prices, a point singled out by Bird in his report.
He also listed Southern Africa’s worst drought in decades; a “much weaker and volatile currency” worsened by the political scenario at home; and rapid increases in both local and imported cost of goods.
Some of these troubles might subside in 2017 but depressed earnings aren’t likely to.
“We think the environment is expected to remain challenging, with several tailwinds of the past decade transforming into headwinds,” says Bray, citing tightening competition – with the arrival of foreign retailers like Cotton On; persisting high joblessness rates; and the regulatory landscape that has cut down on reckless lending and, consequently, restricted credit growth.
Bird’s take is sobering. “We believe that the next financial year will be even more challenging than the one just past, with the consumer coming under immense pressure in what we see as a stagflation environment in South Africa and difficult conditions remaining in our other African markets.” Despite the downside, he said Mr Price top brass intended to “continue to deliver acceptable returns”.
Tsotsotso is not convinced. “Mr Price has been punished mostly because of the growth story not keeping up with expectation. The growth trajectory priced into the stock is proving to be difficult to realise in a heavily traded segment, which has led to a de-rating,” he notes.
“Negative volume growth is pronounced at MRP, and we doubt that MRP will be able to continue to pass on 10% price increases to the consumer without doing further damage to its brand offering. Tougher trading conditions are due to new credible competitors in their targeted LSM segment.”
After a long period of rapid growth, analysts ascribed the slower growth to “an intensifying competitive landscape”. The arrival of Cotton On and Zara hasn’t helped Mr Price – or the unlisted Edcon, among others – increase market share. The Durban outfit’s fortunes are suddenly anything but inspiring.
Tsotsotso says they expect 2017 to be another tough year. “We don’t see prospects of real wage growth or job growth,” asserts Tsotsotso. “Inflation is well managed on an overall basket perspective, but the consumer component is expected to continue to be negative, with possibly higher energy and administered prices. Competition will only intensify, so I don’t see the prospects as being particularly favourable.”
This article originally appeared in the 9 February edition of finweek. Buy and download the magazine here.