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Local retailers are outperforming a bad economy

| Economic factors

South African retailers have been battered by poor trading conditions, rising job losses and weak economic growth, which has made it difficult for companies to pass on costs to their customers.

Nevertheless, last week, the market was pleasantly surprised by the results of local retailers Clicks and Pick n Pay.

 

While most retailers are struggling to sort out their foreign calamities, these two are making headway in the local market.

Both improved their revenue and margins, and both are expanding their reach over the next financial year to pursue additional market share.

For Clicks, health and beauty sales rose 10.5percent in its year to end-August, amid market-share growth across all their core product categories.

Clicks operates 704 stores and 545 pharmacies and increased its share of the retail pharmacy market one percentage point to 24.9percent.

Management of Clicks says it is well-positioned to extend these market share gains in the future.

Reading all of this, one might feel the urge to buy the share immediately, but the price/earnings (* /e) ratio of 35 times might be too rich.

Pick n Pay struggled for several years, but seems to have turned the corner properly. While Spar, Woolworths and Shoprite struggle with their foreign operations, they are homing-in on the local market.

Their benefit is they've paid their school fees in Australia in the past. While they were spending millions in Australia and took their eye off the ball in South Africa, Shoprite was doing well and optimising its operations.

Pick n Pay's trading margin, which also deducts other costs of sales, such as labour, rent and rates; edged up to 2.7percent from 2.6percent.

At this level, it remains significantly behind Shoprite’s South African trading margin of about 5percent. With Shoprite’s change in management and its problems in Africa, it gave Pick n Pay a chance again.

Gaining a little bit of market share can significantly enhance its performance.

Unfortunately, it is priced for perfection, trading at a * :e ratio of 27.

At this valuation level, they will have to perform well in the next year.

The share price is now in positive territory for the year to date, as is Woolworths, Spar, Clicks.

These shares are all trading at * :e ratios north of 20 times.

The commonality is that they all sell products that you need every day, therefore they are more popular shares to hold.

Given the defensive nature of this type of retail stocks, it is reasonable to be expensive.

Not all retailers did well since the beginning of the year. Shoprite, Dis-Chem, Massmart, Truworths are all down, and Massmart’s share price halved since January.

South Africa's suffering consumers may be set for a reprieve after in- flation moderated in September, coming in below analyst expectations, falling from 4.3percent to just more than 4percent - the slowest rate since 2011.

This marks the third consecutive reading below the midpoint of the South African Reserve Bank's (Sarb's) 3 to 6percent target band, strengthening the argument for the Sarb to join the move globally towards lower interest rates.

In the current environment, retailers are finding it challenging to balance two key objectives; sales growth and maintaining profit margins.

Any improvement on the local front can boost their profits.

Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity.

BUSINESS REPORT 

 

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