Retail is yet to turn the corner
Good news from Black Friday
But December sales figures may show a slump if shoppers did a large portion of their spending during November frenzy
Black Friday did the trick for retailers in November, with shoppers scrambling for bargains and driving year-on-year sales 8.2% higher. It was the strongest rise in retail sales since June 2012 and trounced analysts’ consensus expectation of a 3.5% rise.
An overjoyed market responded by lifting the JSE general retailers index by almost 8% to its best level since August 2016 in the week of the sales data’s release on January 17. The market will now be looking for assurance that the stronger sales growth trend is sustainable.
Investec Bank economist Kamilla Kaplan has reservations. "There is a risk of the stronger than expected outcome in November giving way to weaker than usual December sales growth," she says in a research note.
Kaplan points to the Bureau for Economic Research’s fourth-quarter 2017 retail sector confidence survey. "Confidence among retailers remained depressed and survey respondents noted that conditions in the retail sector remain tough," she says.
A sharp slowdown in December retail sales growth would be in keeping with the experience in 2016. Sales growth in November 2016, the first in which SA consumers had a taste of a Black Friday sales drive, came in at 3.1% and was followed by a slump to 0.9% growth in Decembeshopr.
This year there are some positive factors that were absent a year ago. The breaking of the drought in the northern provinces and a stronger rand has resulted in far lower product-price inflation and in many instances product-price deflation. On the political front, deputy president Cyril Ramaphosa’s election as ANC president in December has brought hope of a revival in consumer confidence.
A spate of trading updates provides only a limited indication of how retail sales will pan out in 2018. The updates range from excellent to mediocre and downright bad.
Among fashion retailers, Mr Price impressed. It has clearly put the big setback in its past year to April 1 well behind it. It was a year in which poor product selection, big stock writedowns and market-share loss left the retailer nursing a 13.8% headline EPS (HEPS) slump.
Mr Price’s response to its past financial year’s woes has impressed Daniel Isaacs of 36One Asset Management. "I recently attended a product presentation by Mr Price," he says. "Their fashion line-up was spot on and their pricing points excellent."
It showed in results for the 13 weeks to December 30, with sales in its core apparel division — which accounts for 70% of total sales — up a hefty 10.1%.
The rise was led by the flagship MRP Apparel brand, which upped sales 11.3% and same store sales 8.2%, despite minimal internal inflation of only 1%.
Mr Price’s performance was not the result of a Black Friday wonder. The group reports that sales growth was consistent across all three months with retail sales and other income exceeding R3bn for the first time in a single month in December.
The market has rewarded Mr Price by boosting its price into new-high territory and its p:e to 26.7. Investors are looking to a repeat of the 23.6% HEPS rise and seem unlikely to be disappointed.
December also proved to be a good month for The Foschini Group (TFG), with the retailer reporting trading in its core TFG Africa clothing division as being "above expectation". In December the division achieved an 11.4% sales increase, while in the first nine months of the year the rise was a solid 8.5% against the background of 0.7% price deflation.
"TFG and Mr Price both performed brilliantly," says Alec Abraham of Sasfin Securities. "They are grabbing market share from Woolworths, Truworths and probably Edgars."
But while consumers were still buying clothes from TFG with enthusiasm in December, they were cutting back on their spending on other items. Sales declines across TFG Africa’s nonclothing brands ranged from 0.8% on jewellery to 10.8% on cellphones.
Trading on a 17 p:e, TFG appears fairly priced at a time when investors are awaiting clarity on the impact on results of two recent acquisitions — Retail Apparel Group in Australia and Hobbs in the UK.
Falling full-square into the downright bad trading update category was Woolworths, which warns that in the 26 weeks to December 24 HEPS will fall by 12.5%-17.5%. It will follow a 7.6% fall in the year to June.
The only saving grace for Woolworths in its latest 26 weeks was a 9.4% rise in food sales. But it battled in the SA clothing space, with sales falling 0.2% and volume down almost 1%.
But it is in Australia where the really big damage is being done by its David Jones (DJs) department store division, acquired in 2014 for R21.4bn. DJs limped in with sales down 3.3% but profit damage is likely to have been far worse.
Ominously, DJs’ profit before tax slumped 73% in the second half of the past financial year. A reassessment of the carrying value of the David Jones assets is being carried out by Woolworths.
Also falling in the bad update category was Truworths, which reported sales growth of a mere 1% in its SA and UK operations in the 26 weeks to December 31. For the period, HEPS are expected to fall 1%-3% and will follow a 0.8% fall in the 53 weeks to July 2.
The only other trading update that can be termed excellent was from Shoprite, at least as far as its SA operations are concerned. In the six months to December the retailer’s SA supermarket division excelled, turning in sales growth of 7.8% despite price deflation of 0.4%.
Similarly solid performances were produced by Shoprite’s furniture and OK food franchise operations.
It was only in non-SA supermarkets that performance flagged, with sales in rand falling 0.4%. There was a particularly weak showing from its key Angola market, where sales fell 13% in rand and 9.5% in constant currency terms.
However, the sales fall is understandable given the exceptional showing in Shoprite’s year to June 2017 — when African sales, led by Angola, lifted 13.5% to R24.8bn and by 33.8% in constant currency terms.
Undoubtedly, another challenging year lies ahead for retailers. Investors wanting retail exposure should go with those who have already shown that their business models are a match for the challenge.