Clothing and footwear sales growth loses momentum: survey

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This indicates the extent of SA's consumer spending slowdown as historically sales of semi-durable goods have mostly remained buoyant. High unemployment and slow income growth in SA have checked household expenditure‚ already crimped by soaring utility costs and rising debt. Recent trading updates from retail players have pointed to a marked deceleration across the sectors.

As the country's main engine of growth‚ consumer spending accounts for about 65% of gross domestic product‚ and a slowdown would have a marked effect on the growth outlook for SA.

Modest growth

Derek Engelbrecht‚ retail and consumer products sector leader at EY said growth in retail sales volumes remained modest during the third quarter‚ with sales performances diverging notably according to the type of retailer.

"Following very poor sales growth during the first half of the year‚ hardware sales and sales of non-durable goods such as food‚ beverages‚ tobacco products‚ cosmetics and pharmaceuticals recovered somewhat during the third quarter. In contrast‚ it appears as though the sales growth of retailers in semi-durable goods such as clothing‚ footwear‚ sporting equipment‚ CDs and toys slowed significantly compared to the surprisingly robust rates recorded in the first half of the year‚" he said.

Last month‚ Truworths (TRU)‚ which breached the R10bn mark for sales for the first time‚ missed analysts' forecasts. Besides its flagship Truworths chain‚ the group's retail brands include Identity‚ Daniel Hechter‚ Elements‚ Inwear and LTD.

Truworths' fully diluted headline earnings per share increased by 8.4% to 560.7c.

"It's not a bad result‚ but it's not what we hoped for when we started the year‚" CEO Michael Mark said.

Unsecured lending slows

Credit card sales make up 72% of Truworths' sales. The company's operating margin dropped slightly to 34.5% because of bad debt.

The slowdown in unsecured lending‚ which had given retail sales a significant boost over the past three years‚ is expected to be one of the major contributors to the decline in spending. Although there are indications that borrowing for consumption has slowed as lending criteria have been tightened‚ concern remains about the ability of consumers to repay loans and accounts.

At its annual general meeting this month‚ The Foschini Group (TFG)‚ which also relies heavily on credit‚ said sales since the beginning of July had strengthened‚ with growth up by 13%. This follows challenging trading conditions for the first five months of the financial year‚ in which total sales were up by 9.1% and same-store sales growth was up by 4.1%.

"Economic conditions in SA will remain difficult in the year ahead‚ with the credit environment likely to deteriorate further due to current levels of consumer indebtedness‚" CEO Doug Murray said.

Meanwhile‚ Mr Price (MPC) posted year-on-year total sales growth of 14% and comparable store sales growth of 9.1% for the first 18 weeks of the financial year ending March 2014.

"While the current credit environment in SA remains challenging‚ the group is satisfied that the initiatives undertaken last year to reduce credit sales growth have not negatively impacted overall sales growth‚" the fashion retailer said.

Mixed messages

Interestingly‚ there have been some mixed fortunes within the retail sector in recent months. The growth in hardware sales and non-durable goods sales volumes improved slightly during the third quarter compared to the very weak growth witnessed during the first half of 2013‚ the EY/BER survey results indicate.

Engelbrecht noted that non-durable goods sales volumes may have been supported by the fact that most non-durable goods retailers did not hike their selling prices in line with the high increases in their inputs costs.

"Downward pressure on margins continue to erode the overall profitability levels of non-durable goods retailers and manufacturers‚" he said.

Whereas non-durable goods retailers were still able to keep their selling price increases in check‚ soaring input costs forced retailers in durable and semi-durable goods to implement significant price hikes during the third quarter.

High costs rising

Retailers in durable and semi-durable goods reported that the rate of increase in their input costs is now the highest it has been in five years. Durable and semi-durable goods have a high import content‚ and the input costs of these retailers are therefore closely tied to the rand exchange rate. Trading around R10.20 to the dollar‚ the rand has depreciated by more than 30% over the last 18 months‚ putting substantial upward pressure on the cost of imported goods such as household appliances‚ electronic goods‚ sporting equipment‚ toys‚ CD's‚ and clothing and footwear.

"It appears that rising prices‚ coupled with a deterioration in income and credit growth‚ are finally starting to take a toll on semi-durable goods retail sales‚ while the growth in furniture and household appliances remains weak‚" Engelbrecht said.

Growth meets expectations

Although trading conditions remained challenging in the retail sector during the third quarter‚ there has also been some positive news. Most retailers indicated that sales volumes grew in line with their earlier expectations and did not slow further from the 3% year-on-year pace recorded during the first half of the year. Retailers have also not reported an involuntary build-up of stocks‚ which would typically be indicative of a sharp or unexpected deterioration in consumer demand.

Furthermore‚ retailer confidence levels actually recovered some lost ground during the third quarter.

"The number of retailers reporting that they are satisfied with prevailing business conditions fell from 50% in the first quarter of the year to 41% in the second quarter‚ but rebounded to 49% in the third quarter‚" the survey showed.

Not a festive season

Looking ahead though‚ most retailers will probably not find this festive season to be particularly jovial. Although some retailers may see positive base effects‚ given that retail sales volumes really disappointed during the fourth quarter of last year with growth of only 2.4% y/y‚ factors such as record high fuel prices and soaring import prices‚ rising food inflation‚ a deterioration in job creation prospects and slower growth in government spending will likely continue to weigh down income and credit growth - and hence the growth in retail sales volumes - during the final quarter of the year.