Surprising resilience

“They are looking for instant gratification, they want to buy a little happiness,” says Nedcor Securities analyst Syd Vianello.

So while they won't buy a new duvet or wine glasses, they will buy a new dress; they won't buy a new power drill but they will buy braai tongs or toys; they won't go on holiday but they will splurge on food and booze — and lots of it.

“Consumers know interest rates are coming down, which will ease mortgage repayments, so they took the petrol savings and spent them,” he says.

This was reflected in better than expected third-quarter results from Shoprite, Mr Price, Massmart and Truworths.

At Clicks sales increased by 11% in the last quarter, driven by the smaller gifting ranges which drove strong festive season trading. At Foschini growth was benign.

However, analysts don't expect the rest of 2009 to be plain sailing for retailers.

Slow growth

According to official data, SA's economy barely grew in the third quarter of 2008. Moody's Economy.com expects economic activity to be muted until the third or fourth quarter of this year, with GDP growth of just 1.5%.

“One of the imponderables of this year is to what extent job losses will affect retail sales,” says Vianello. “It's a risk for retailers.” But he adds that the declining interest rate and the social grant system will support some spending.

Another risk for food retailers is the stabilisation of food inflation. That's because as inflation eases, the underlying growth driver in food will disappear.

“For retailers it means that their sales growth in the latter part of this year will be compared to past growth with big inflation bases,” says RMB Asset Management analyst Evan Walker.

Retail sales

Mr Price recorded sales growth of 20% for the three months to December. Comparable sales (excluding sales from new stores) grew 15.3%, well above the internal inflation rate of 6.3%. But the home division is still suffering from discerning spending, growing comparable sales by just 1.7%.

Truworths grew sales by around 1%, after accounting for inflation of 6% and increased trading space of 11%. “Sales were behind Mr Price,” says Coronation Fund Managers analyst Quinton Ivan, “but headline earnings per share are expected to increase by between 20% and 25%. This is a good result and suggests very good cost controls, the reversal of bad debts, or an increase in gross profit margins because of fewer markdowns.”

Massmart's half-year results increased 13.2% over the prior period with inflation estimated at 9.9%. Particularly pleasing was Game which grew faster than the previous year. “Game is stocking affordable products,” says Vianello. “And consumers are shifting to value.”

Game also fared well in Africa, adds Massmart CEO Grant Pattison. “Africa is in a different cycle, one that is still sheltered by the [recent] commodity boom and Chinese investment. Spending patterns have not been affected — yet.”

Makro's performance was driven by growth in food and wine sales, though food growth was supported by inflation.

However sales at Massbuild declined. “The consumer is averse to spending money on home improvements — and that wasn't only at Builders Warehouse but across the entire DIY category,” says Pattison.

In the six months to December, Shoprite grew turnover by 27.3% to R29,6bn. Growth on a like-for-like basis was 22%. Like Game, Shoprite's non-SA businesses galloped ahead of budget. Rand turnover grew by 50.3%. A contributing factor, says Shoprite, was that most non-SA currencies strengthened against the rand.

While it is clear that some retailers are faring okay in difficult circumstances, investors would be wise to be cautious as this sector will face strong headwinds for the better part of the year.

Source: Financial Mail

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