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Posted On Friday, 18 July 2003 02:00 Published by
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The benefits of lower interest rates will be felt mainly by appliance and clothing retailers.
As a nation, SA is certainly not over-borrowed. Household debt in
relation to disposable income in SA is not only low in world terms, at 52%,
but has been declining over the past five years. It's now at about the same
level as 10 years ago.  Whether the lower level of indebtedness will lead to
significantly higher consumer spending remains to be seen. Yet there is
likely to be some uptick simply because consumers now have a few hundred
rand a month more.  So, which retail and banking sectors stand to gain from
higher spending?  Choosing between banks and retailers is difficult as there
is a large degree of symbiosis between them. In other words, banks will lend
money to consumers if the appetite to spend exists. If lower interest rates
don't result in greater consumer spending, then the banks won't benefit.
Between 1995 and 2001, retailers were on a declining trend relative to
banks. But since then, retailers have shown relative strength. One of the
main reasons is that many of the large components of the general retailers
sector, such as Edcon and Foschini, have restructured their operations and
improved earnings significantly.  Within the broad categories of private
consumption expenditure, durable consumption is the most sensitive to
interest rate changes. This is because durables tend to be the most
expensive items on a consumer's shopping list.  Durables include furniture
and appliances. Non durables, like food, are far more regular purchases and
are thus less sensitive to interest rate movements. Semi durables, such as
clothing and footwear, fall somewhere in between.  Furniture and appliance
retailing is still dogged by over capacity in the industry but this
situation is improving, partly because of JD Group's recent acquisition of
Profurn and the subsequent rationalisation of Profurn's store base.
Imported appliance prices have fallen in recent months as marked-down stock
has been cleared. So, though consumers have benefited from lower appliance
prices and will continue to benefit from lower interest rates, the effect on
furniture and appliance retailers may be muted until the rationalisation of
the industry is complete.  JD Group and Ellerine are the two main listed
furniture and appliance retailers and should benefit from interest rate cuts
later on.  Durable goods retailers such as Massmart and Incredible
Connection have been experiencing the benefits of lower interest rates
sooner than the furniture retailers (see Companies).  Clothing retail is
probably the best bet among the retailers as the rationalisation of that
industry is complete and clothing and footwear purchases will be directly
boosted by lower interest rates.  Though Edcon and Foschini have recently
reported strong profit growth, it looks like there is a lot more to come
from both of them. Truworths, too, should maintain strong earnings growth,
as should Mr Price.  As the graph shows, there is an inverse correlation
between the prime rate and Edcon's earnings growth. In other words, as
interest rates fall, Edcon's earnings rise and vice versa. The same pattern
is evident for other clothing retailers.  Though fast-moving consumer goods
retailers such as Pick 'n Pay, Shoprite and Clicks may derive some benefit
from lower interest rates, the effect should be smaller than for the
clothing retailers.  One area that traditionally would have been expected to
benefit from lower interest rates is motor car sales. The problem this time
is that car prices increased rapidly in line with the rand's decline in 2001
and 2002 but have not fallen as the rand has strengthened. Indications are
that demand for new cars remains sluggish at best and may take some time to
recover, even with lower interest rates.  To what extent retailers will
benefit will depend largely on consumer appetite for increasing debt. One of
the reasons that consumers may be feeling chipper is the upsurge in house
prices during the past two years or so.  But militating against the
feel-good factor are the stronger rand and high unemployment.

Publisher: Finantial Mail
Source: Chris Gilmour
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