Defying retail economic logic

Optimism was fuelled by consumer spending data from Statistics SA for May showing a 6.4% rise in real terms compared with a year earlier. Growth was off a low base that was recorded in May 2011 and should be treated with caution, says John Loos, FNB household and property sector strategist.

Economist Mike Schüssler is also wary. "Disposable income rose only 3,3% [year on year] in May, the lowest rise since September 2005," he says. He uses BankservAfrica's disposable income index data, which takes into account tax and employer deductions. "The index explains 93% of consumer behaviour," he adds.

However, it does not explain why consumer spending went up in May and appears it will not do that for an increase in June either.

"June was a very good month for us," says Ronnie Stein, The Foschini Group's (TFG) financial director. "In fact, it was a good month for everyone."

Cash withdrawals from ATMs also point to a strong June. "Cash withdrawals were up 6.6% year on year, the highest rise in 24 months," says Spark ATM Systems MD Marc Sternberg. "Cash is used in 88% of consumer sales, making it a good measure of what is happening at the retail level," he says.

One key reason for robust consumer spending appears to be the steep rise in unsecured borrowing. In the nine months to March unsecured consumer debt rose R30,83bn (34%) to R120,8bn, the national credit regulator reports. The annualised increase was 40%.

Updates from major retailers ahead of annual results indicate that volume growth fell but was generally made up for by price rises. This is seen in Shoprite's sales in its year to June, which lifted 14.4% to R82,7bn compared with a 9,7% rise the year before. Sales in the year under review, adjusted for the retailer's 4.9% internal price inflation (IPI), were up 9.5%, similar to the 9.8% real growth achieved in its previous year.

Shoprite's ability to limit IPI to 4.9% indicates it used its buying power to full effect against a background of average food price inflation of 8.5%. Higher margins were also achieved, indicating a 21% rise in headline EPS (HEPS) expected by analysts polled by I-Net.

This still leaves Shoprite on a heady 27 forward p:e, making Pick n Pay, which is regaining market share, an attractive alternative on a forward 20,8 p:e. Looking two financial years ahead, analysts' forecasts put Pick n Pay on a forward 12,4 p:e and Shoprite on a forward 19,2 p:e.

The Woolworths trading update for its year to June was mixed. Food sales rose 12.6% (5.5% IPI) and clothing sales were up a similarly modest 11.9% (6.1% IPI). But the retailer's strategy, which includes cutting costs and lifting margins - especially through its buyout of franchisees - is clearly working. Woolworths expects its HEPS to be up by 20%-30%, ahead of analysts' consensus forecast.

The Truworths update for its year to 1 July shows sales up 12.7% (4.7% IPI) and indicates a HEPS rise of 14%-17%, in line with analysts' forecasts. The company's showing lags a resurgent TFG, which upped sales 17% and HEPS 22% in its year to March. Analysts forecast a similar trend over the next two years, with the EPS of Truworths rising at 14.8%/year and TFG's increasing at 19%/year. TFG on a p:e of forward 15,4 looks like a better bet than Truworths on an immediate forward p:e of 20,6.

But analysts' forecasts may be way too optimistic and the caution advised by Loos and Schüssler may yet prove to be an invaluable early warning.

Stein disagrees with this view. "I don't see a big downturn in demand coming," he says. "The big risk for us would be rising job losses, and we are not seeing that."

Source: Financial Mail