Retail sector facing subdued operating conditions
By Dineo Faku - Jan 10th, 08:44
Despite South Africa exiting the technical recession following growth in the economy in the three months to September, the outlook for the country’s retail sector for 2019 continues to be subdued.
The Absa Manufacturing PMI released recently rose to 50.7 points in December from 49.5 points in the previous month, and was encouraging after nine months of contraction, but would have little to impact on retail, analysts said.
Damon Buss, equity analyst at Cape Town-based Electus Fund Managers said that the environment would not get much easier for retailers, as household incomes remained under pressure due to muted wage growth and rising inflation.
“We need business and consumer confidence to come back, and this will likely only come after the national elections, assuming certain policies are implemented,” he said. He also said the operating environment remained weak, with the stubbornly high unemployment rate not boding well for cash-strapped consumers.
Last year was a tough year across the board for retailers, with Africa’s food giant Shoprite reporting its first earnings decline in 18 years.
Buss said that in addition to the economic headwinds, Shoprite had shed market share owing to supply chain issues. Shoprite’s woes were a gain for Pick n Pay, he said.
Buss expected Shoprite’s new management to be able to deal with the supply chain issues in 2019, while he also expected Pick n Pay’s improving sales trend to continue.
South Africa’s largest clothing retailer, Edcon, owner of Edgars, Jet, and CNA, ended the year on a low note, following a recapitalisation programme, which fuelled fears of a jobs bloodbath of 140 000 employees amid a possible liquidation.
Buss said Edcon’s biggest problem remained its high debt level, which needed to be restructured.
However, funders have stipulated that Edcon must get its key landlords to agree to a two-year “rent holiday” before the funders will be willing to convert their debt to equity. Buss believes landlords are unlikely to accept Edcon’s offer of a 5 percent equity share in exchange for the “rent holiday”, as Edgars’ return to profitability remains highly uncertain.
“Edcon has got to settle its debt. Jet continues to perform well. CNA is okay, but not great,” he said, adding that deep pockets were required to fix the company. Edcon is the biggest apparel retailer in South Africa. If it entered liquidation, there would be significant market share available for competitors to mop up, he said.
Woolworths Fashion, Beauty & Home was likely to continue to underperform due to recent executive changes which had left gaps in the division’s management.
“In addition, the Woolworths Holding Limited (WHL) board did not provide any certainty at the 2018 annual general meeting that it would not have to further impair its David Jones investment, indicating that 2019 could be another poor year for WHL,” Buss said.
Bjorn Samuels, an equity analyst at Argon Asset Management, forecast that the environment was largely expected to remain unchanged from last year, with most of the factors causing pressure on disposable income still being present.
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