Opinion - retail sector at end of boom road?

Posted On Friday, 14 January 2005 02:00 Published by
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With the holiday season behind, the retailers are looking at the scoreboard.

Presenter: Lindsay Williams Guest(s): Syd Vianello

With the holiday season behind, the retailers are looking at the scoreboard.

Trading updates from the retail sector - Truworths, Lewis, Massmart, Shoprite, Edcon. Lindsay Williams gets Syd Vianello, retail analyst at Nedcor Securities, on the line

LINDSAY WILLIAMS: What's your impression overall - before we get into the companies as individuals - about the holiday trading period?

SYD VIANELLO: Overall, if I look at the trading updates and I compare them with our own internal forecasts - as a generalisation they're all in line with what we expected, notwithstanding the fact that some are a lot better than others. They are all in line with what was expected, excepting perhaps Truworths - Truworths' results are a lot better than what I thought they would be! That's the best way to put it. I suppose you are now going to say "the Lewis numbers don't look particularly impressive, relative to the total." Interestingly, Lewis is exactly in line with what we thought they would be. They did a half-year presentation - one just got the impression that they weren't going to do much better than that, and that's exactly what the position was. But I had a phonecall from one of their rivals soon after they put out the announcement yesterday - JD Group. They will be reporting next week, and they assure me that the other furniture retailers - and I have spoken to somebody else in the industry as well today - the other furniture retailers are going to come up with numbers significantly better than the Lewis numbers. If I have to hazard a guess, those numbers are going to be anywhere - depends on which one you are talking about - between 16% and 20% up on the previous year. So Lewis is really a kind of an aberration in the total picture.

LINDSAY WILLIAMS: I remember when Lewis first listed - you weren't that keen on them. You were keen, you thought they were a decent company - but from a share price point of view you thought they wouldn't do that well. The share price has started to come off, and the behaviour of the shares has really interested me in the first couple weeks of 2005. We're getting these trading updates - Truworths, as you said, was great, headline earnings per share expected to be 25% to 35% better than the comparable previous period, and yet the share price on that day, I think, fell some 1.8%. Is this telling us that the retail sector is fully discounting in these good numbers?

SYD VIANELLO: Well, it's interesting that you say that - because that is what I have been saying to institutions as well. We are in a situation now where we have some pretty demanding numbers, and pretty compelling numbers.

Now what's really happening - if you meet the number, your share does nothing, or it drifts a little bit lower. If you do a lot better than the number, I suppose the share price stays the same. But if there is any kind of whiff or hint that maybe you are somewhat below expectations, the share price gets hammered. Edcon's numbers today are... if we talk about the apparel business, forget about the others - the numbers were outstanding.

But the numbers are pretty much in line with what people expected, and the bottom line of that announcement saying "we are reconfirming the 60% profit growth" - all that they are really saying is that nothing has changed since we last spoke to you, which was in November 2004 with the half-year results.

The share price has recovered today, but just remember the share price had fallen as much as 10% in the first few days of this week, and it's really just made a partial recovery today. Remember last week it was trading at over R305 a share. So if you take that point, and you take the point where it is now - yes, it has come off...

LINDSAY WILLIAMS: So in order to see share price growth in the sector as a whole - without getting into individual case studies - the simple fact is that there is going to have to be some spectacular performances in order to beat the highs that we have seen?

SYD VIANELLO: That's the conclusion I am drawing right now, and that's what the evidence is telling me. Maybe I am wrong... we are kind of pre-empting it a bit. Let's say the JD numbers come out next week, and they are in the kind of range that I was talking about... but because that is the range that the market is expecting - unless of course they come up with something dramatically better than the market - I suppose the share price is not going to show any dramatic improvement from the present levels where it is now.

LINDSAY WILLIAMS: Yes, an interesting situation. So having has a fantastic period over 2004, and even before that - shares like Truworths, Lewis, Edcon, Massmart, Shoprite, JD Group, Woollies, Pick 'n Pay, Foschini - should we be taking something off the table? Should we be banking some profits here?

SYD VIANELLO: Well, you know... if we look at the rand's performance - this is another interesting one - the rand closed the year at 5.64 or whatever it was, somewhere around there against the dollar, and it's now virtually back to six again. Let's take yesterday - yesterday the rand strengthened when those US figures came out, but today the rand started weakening again. Are we seeing a situation where we will see some rand weakness in 2005? You know what that means - it means there could well be a rotation out of the sectors that have had their bull run into something like commodities, for instance, where any rand weakness is good for companies in the export business, particularly in the commodities business. That's the kind of feeling I am getting. We've had the run in retail - what's going to drive retail in 2005?

Let's say what drove it in 2004? Really, I suppose two major drivers were firstly those huge interest rate cuts that put a lot of money in people's pockets, and they went out and spent that money. The second factor was the lack of inflation, and we had employment growth. Now what could we have in 2005? Wage increases are probably going to come in a little bit lower than 2004. Our own economists are now saying no interest rate movements in 2005 at all - in other words, no more cuts, no more extra money in people's pockets. Inflation - pretty much the same as where it was in 2004, particularly for food which is benign, which means there will be some extra money in people's pockets, but nothing different from where it was last year. I suppose we will see a bit more employment growth - if the economy continues expanding. But is it going to be materially different from where it was in 2004? Probably not, so what are the drivers this year? There are some drivers, but the drivers do not include the interest factor that we had last year. Better still, the debt-to-income ratio of consumers has of course increased dramatically in the last six months. I suppose when the final December 2004 figures come out we will see that it has gone up again - that means consumers, on average, have more debt, even though interest rates have come down. They have to service more debt. As you know, as the year progressed, and they started spending the money - they are going to have to allocate more money to servicing it. That means, once again, further pressure on consumer spending. So, to me, we are pretty much at the end of the boom road...


Publisher: Business Day
Source: Business Day

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