Retailers stagger, buyers balk

• The sector’s index is down 21% this year, and no improvement is likely until the economy turns the corner

The JSE’s general retailers index has had its worst year in almost two decades, encapsulating what has been an annus horribilis for the sector as it battles a depressed consumer environment. Analysts say the outlook is unlikely to change until momentum in the wider economy — hobbled by poor growth and widespread joblessness — improves and consumer spending power recovers.

The JSE’s general retailers index has had its worst year in almost two decades, encapsulating what has been an annus horribilis for the sector as it battles a depressed consumer environment.

Analysts say the outlook is unlikely to change until momentum in the wider economy — hobbled by poor growth and widespread joblessness — improves and consumer spending power recovers.

The aftermath of ill-fated international expansion efforts is also weighing on a number of shares, with Woolworths, Truworths International and Shoprite all working hard to regroup.

The retail index has fallen almost 21% since January, the steepest decline for the index since 2000.

Massmart, the owner of Game, Builders Warehouse and Makro, has been one of the biggest losers, with its share price declining about 56% since January. Massmart’s market capitalisation has shrunk to under R10bn, well below that of counterparts such as Woolworths (with a market cap of R58.5bn) and Pepkor (R59.2bn).

Woolworths, whose shares have been hit hard in recent years thanks to a number of writedowns of its David Jones acquisition in Australia, has managed a 1.2% rise since January. But at Friday’s close of R55.78, it was still well shy of its record high of R108 in 2015.

PERFORMANCE

Truworths, whose expansion into the UK has seen it write down the value of its purchase of shoe chain Office, has fallen 41.2% in 2019. Shoprite, whose African operations have taken a knock in recent months, is down 30.85%.

There are two factors playing into the overall performance of the sector, according to Hannes van den Berg, the co-head of SA equity and multi-asset at Investec Asset Management.

The macro environment has changed significantly from 15 years ago, when retailers found it easier to operate and roll out stores. Now consumers are facing tougher times, he said, particularly as wage growth is at or below inflation, credit is less easily accessible and property prices a contributor to the health of consumers’ balance sheets are increasingly under pressure.

He said at a company-specific level a number of firms have expanded outside SA in recent years, with mixed results, while others had “scored some own goals by not positioning their brands correctly or tried to roll out too aggressively”.

Woolworths and Truworths have found it a lot more difficult to operate in the Australian and UK markets, he said.

This was in part because labour and property, two important business components, are more expensive than in SA.

Though Massmart has been hit by the broader economic issues, Van den Berg said it had also battled to reposition some of its brands, such as Game, as well as the brands under its Masscash division, such as Jumbo and Cambridge.

Ben Volkwyn, head of private clients at Cannon Asset Managers, said challenging economic conditions have been the main driver of poor performance. “The expectation is that households will remain under financial pressure, requiring retailers to rethink their business models.”

Retail sales figures released by Stats SA reflect the muted environment, with annual growth slowing consistently for the past six months.

There are, however, outliers such as Clicks. The health-care and beauty retailer’s share is up 27.69% in 2019.

Volkwyn said Clicks is more defensive than some of its retail peers. “Additionally, it continues to make smart decisions operationally and was only expanding operations with the minimum required floor space.”

Van den Burg said it remains to be seen when things would turn around for the local retail sector. He stressed that retail is a cyclical business, and investing in a retailer “is a play on growth”.

“The country could do with more action, and less ideas and talk ... to give businesses greater confidence to create jobs and employ more people.

“As things start to improve, hopefully retailers will see the benefit of that.”