Food shares remain a good buy in recessionary times

Gilmour says consumers may downtrade, but will continue to shop for food.

Earlier this month, Fitch Ratings said the outlook for the local retail sector remained weak.

Fitch said retail companies in SA faced difficult trading conditions for the rest of the year and into next, despite expected lower interest rates. The durable and semidurable markets segments were the most susceptible to negative rating actions.

“In the face of declining sales, the increased challenge to sustain profitability and liquidity management will likely put retail corporate ratings under pressure, particularly for retailers that maintain more aggressive capital expenditure programmes,” said Raymond Hill, head of Fitch's emerging market team.

Retail CEOs had low confidence, the latest PricewaterhouseCoopers (PwC) annual CEO survey showed recently. Only 14% of the 64 retail CEOs interviewed were very confident that they could increase turnover over the next 12 months, compared with 44% in the survey last year.

PWC's retail leader Anton Wentzel said recently: “Consumers will tighten their belts even further, with spending on ‘big-ticket' items, such as cars, luxury items, major appliances and home improvements, discretionary purchases and property continuing to decline.”

But Fitch expected the food segment to be more stable given the defensive nature of food retailers. “Value-focused food retailers are operationally better positioned than premium food retailers in the economic downturn,” it said.

Imara SP Reid analyst Warwick Lucas says even if food retailers dropped gross margins, they would be able to benefit from having stock on hand when inflation went up, and would reap the benefit of the difference in pricing.

He says while they generally have narrow margins, when inflation comes off the benefit to the consumer is lagged and does not flow straight through.

Lucas says food retailers can also benefit from strong bargaining positions when negotiating with suppliers.

The Spar Group said recently that despite the economic turmoil and shrinking disposable incomes, the group boosted turnover and operating profit in the first half to March. Turnover was up 24.5%, slightly ahead of the turnover growth for the previous first half, to R16bn. Operating profit was 22% higher at R605m, and headline earnings per share came in 20.5% higher at 242,5c a share.

The group gained market share but the competitive trading environment saw it lose ground in gross profit to 7.9%, from 8.1%, as it held back price increases. It maintained its net margin at 3.8% as a result of reasonably controlled expenses.

Pick n Pay also fared well. In the year to February, it said turnover was 17.4% higher than in the previous year at R49,9bn. Trading profit moved up 11.2%, diluted headline earnings per share 18.1% and headline earnings per share 13.4% to 232,48c. However, the trading profit margin dropped from 3.6% to 3.4% as the group invested in prices to limit the effect of increases on customers.

Shoprite, which has benefited from its African operations, reported turnover of R29,6bn in the six months to December, a 27.3% increase on the prior period.

Source: Business Day

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