Slow profit growth cools appetite for retail stocks

Retail stocks have fallen in the past year although retailers such as Mr Price and Wooworths are still rated highly. Image: Woodlands Boulevard

"The share prices of Truworths and Foschini, generally considered credit retailers, are down," Investec Asset Management equity analyst Diane Laas said. "Retailers that have been exposed to any sort of credit have sold off really aggressively. It's probably justified, because sales growth has slowed.

"There is another story playing out in the market. Cash-based Mr Price apparel's top-line growth came in around 15% and upper-income retailer Woolworths was 11.5% in clothing. Mr Price is definitely a value-focused retailer and Woolies targets a higher-income consumer," Laas said.

The effect of consumer spending and the subsequent moderation in retail spending has been noted by foreign investors, signalling the end of the retail rush.

"The sector doesn't have the popularity it used to have." said independent analyst Ian Cruickshanks. "Foreigners also look at the uncertain political setup - the anxiety between unions and the African National Congress, so we have an early dose of pre-election jitters regarding foreign investment in SA as a whole.

"Retail stocks are still looked on as expensive, but what we have seen in the last year are reasonable results from some of the retailers which have grown into pretty high price:earnings ratios, and that has made them look slightly better valued, but they are still high," Cruickshanks said.

He said the stocks that would remain popular were Shoprite, Woolworths and Mr Price, adding that there was still a question mark over Pick n Pay, which is undergoing a turnaround.

"They have a new chief executive, but it will take time (for him) to prove himself. They are still on a ridiculous price:earnings ratio, so I don't like the look of that stock right now," he added.

Source: Business Day via I-Net Bridge