Weak outlook for SA retailers

In a special report published today, 7 May 2009, Fitch notes retail companies in South Africa still face difficult trading conditions through 2009 and into 2010 despite an expected lower interest rate environment.

The agency believes credit profiles, notably profitability and free cash flow, remain at risk in the economic downturn, with the durable and semi-durable segments most susceptible to negative rating actions.

Data published by the Statistics South Africa confirms the negative trend in retail sales with a year-on-year decline of 4.5% in February 2009.

"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," says Raymond Hill, Head of Fitch's Emerging Market Corporate team.

"In its analysis of retailers, Fitch focuses on lease-adjusted leverage metrics, as these tend to provide a more transparent indication of financial commitments."

Notwithstanding this, Fitch expects the food segment to be more stable given the defensive nature of the food retailers.

Fitch notes that value-focused food retailers are operationally better positioned than premium food retailers in the economic downturn.

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