Woolies and other SA retailers under increasing pressure

(Supplied)
(Supplied)

Cape Town - Dreary results are expected from two of South Africa’s major listed clothing stores, Woolworths and Truworths, in the coming weeks, due to poor local conditions. In addition, local retailers are facing greater competition from overseas retailers, as they expand into South African territory.

A number of listed retail groups' trade results are expected over the next few weeks, and analysts predict dismal figures.

Mvula Seroto, an investment analyst at Catalyst Fund Management, said the figures released by Statistics South Africa (StatsSA) from the retail sector's April sales already indicate that barely any growth occurred on a year-to-year basis.

Retailers who sell clothes and shoes, have the worst figures.

"Many of the national retailers, especially the clothing retailers, are still feeling the pressure of a weaker economic environment and the increasing competition of international retailers like H&M and Cotton On, which are expanding in the market," he said.

South Africa's largest clothing store, Edcon, has already closed down some of its stores, while Stuttafords will permanently close shop in August.

Stuttafords' floor space in the prestigious shopping mall in Canal Walk, is set to be taken up by international retailer H&M.

Yulia Gerasimova and Maxim Nekrasov, analysts at Goldman Sachs, said in a report they expected Woolworths and Truworths to post poor results.

"The year had a difficult start and headwinds for non-essential spending persisted, especially after consumer confidence plummeted amidst the country’s credit downgrades,” they said.

The analysts said even the positive impact of a buoyant Easter weekend could not lift sales in April.  

"We therefore expect Woolworths and Truworths to show poor results for the half-year to end-June."

In addition to their dismal local sales, the retail groups are also increasingly confronted with stiffer competition in their overseas markets, with Truworths in Britain and Woolworths in Australia not performing well.

"This contributes to our expectation that their revenue growth will only decelerate."

The Goldman Sachs analysts believe that this will lead to pressure on the two retailers' margins and this will decrease their headline earnings per share.

Truworths and Woolworths trade reviews are expected next week and their results in August.

The share price of Woolworths has fallen by 10% to R60 over the past month. This is 26% lower than a year ago.

The share price of Truworths is 7% lower for this month at R69. This is 15% lower than a year ago.

Apart from these two retailers, the trade reviews and results of Massmart, which owns Game and Makro, as well as the Shoprite Group's will also be released in the next few weeks.

Goldman Sachs selected Shoprite over Massmart as a promising investment pick.

According to StatsSA sales figures grocery retailers remained steady, despite the trying conditions.

However, these retail groups operate in an environment where food inflation is slowing. But a risk exists that the retailer’s sales in comparison with the same stores as last year, will not climb at the same rate that input costs are rising. This will also put pressure on their profit margins.

"We believe that this has hit Massmart especially hard and this will reflect in their results in the first-half."

Shoprite expects double-digit growth and stable profit margins.

"It will confirm its status as the fastest growing and most profitable South African grocer," they said.

Massmart's share price has been almost 9% lower in the past month and almost 20% lower than a year ago.

Shoprite is 7% lower than a month ago, but almost 18% higher than a year ago.

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