SA retail to stabilise in 2010

The conservative credit profiles of Fitch-rated retailers, however, support a stable outlook for the retail sector.

Weaker-than-expected retail sales and food and beverage sales for October 2009 (down 6.5% and 0.9% respectively year-on-year) are indicative of the continuing underlying pressure in the economy, with a sustained market recovery not expected prior to mid-2010.

Fitch expects that the November 2009 retail figures (expected on 20 January 2010) will remain negative, but believes that the worst has passed for South African retailers, with retail sales bottoming-out in Q409.

Current low consumer confidence levels are expected to gradually improve over the first half of 2010.

"Modest aggregate retail sales growth is expected from mid-2010 onwards, supported by slight South African GDP growth and a continuing low interest rate environment.

"The pace of improvement in consumer retailers' sales and margins is expected to be gradual, and sales will remain well below pre-2009 levels until mid-2011," says Roelof Steenekamp, Director in Fitch's South African corporate team.

"Companies focused on the more value-oriented segments are expected to continue benefiting from consumers "trading down", and should outperform sector peers in 2010."

Fitch expects food inflation to slightly moderate in 2010, which, together with increased competition and an increasing value-focus by leading players, will weigh on the smaller food retailers' sales growth in 2010.

Larger food companies, notably Pick n Pay Stores Ltd (Pick n Pay; 'A+(zaf)'/'F1(zaf)'/ Stable) and Shoprite Holdings Limited (Shoprite), are expected to report continuing sales growth into 2010, on the back of the defensive nature of their products and significant geographical spread of their operations.

Shoprite reported an 11.9% growth in turnover for the six months ended 31 December 2009, with its South African supermarkets growing strongly by 14.6% over this period.

Pick n Pay reported turnover growth of 12.3% for the six months ended 31 August 2009. Both companies outperformed the food retail sector.

Statistics South Africa reported in December 2009 that the worst performing retail sub-sector, for October 2009, was retailers in hardware, paint and glass (down 19.3% yoy), followed by household furniture, appliances and equipment (down 6.4%) and general dealers (down 4.1%).

The best performing sectors were notably the more defensive retailers in pharmaceutical, medical goods and cosmetics (up 1.5%). Food retailers as a whole were down 2.5% yoy.

Retailers involved in the more discretionary, higher-value, durable and semi-durable retail segments such as furniture, household goods and appliances, and hardware, are expected to remain under pressure over the next 12 months. Continuing weak demand conditions in this sub-sector are only expected to improve from late 2010 onwards.

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