Larry Claasen

Industrial Correspondent

RETAIL sales are expected to remain strong in the foreseeable future following the interest rate cut last month.

The cut is supporting robust consumer spending and a retail boom that has seen sales surge on the back of lower income taxes and higher take-home income over the past 18 months.

Retailers speak of SA entering a new growth cycle and use words such as "fundamental" in describing the change in the consumer side of the economy.

This optimism saw retail shares rise to unprecedented levels last year. Edcon, the holding company of Edgars, Jet and CNA, went from R20 a share seven years ago to a record high of R305,75 in December last year.

But some retailers had predicted in December that the spree was ending. General goods retailer Massmart was the first to signal that there might be a slowdown in sales when it said that the beginning of the 2004 Christmas shopping season was below expectations.

But, it all ended well for Massmart, with sales showing a big improvement in the last few shopping days before Christmas.

Andisa Securities retail analyst Evan Walker says, that looking back, Massmart was probably right in signaling that the cycle had peaked. Retail shares have since come down from the highs they reached in December, with Edcon now trading at about R250.

While retailers may not be at the top of the cycle, this does not mean they are expecting a drop in sales any time soon.

Furniture and appliance retailer Ellerine Holdings, which grew turnover 17,1% to R1,69bn and operating profit 26,1% to R308m for the half-year to February, said before the interest rate cut that it expected the buoyant trading conditions to support it for the rest of its financial year.

Walker says the latest rate cut bolstered already-high consumer confidence and extended the business cycle for retailers.

How much longer consumers will continue to spend with confidence is still anyone’s guess — making it difficult to value retail shares.

Walker says the important issue is not how much value there is in retail shares, but the factors supporting the retail sector. High consumer confidence, along with rising employment in the informal sector, are supporting sales.

With these factors supporting the retail sector, there is still some value in retail shares, says Walker.

He is not too concerned about the amount of debt consumers are carrying, as their ability to repay debt is a lot better than it was a few years ago.

Abvest small cap analyst Shawn Stockigt says retailers are now in a better position operationally to make the best off this growth following the difficult period the sector went through a few years ago.

This saw them introduce stricter credit granting procedures and cutting costs to remain competitive.

Stockigt says the retail sector is being consolidated. During the past few years Edcon has bought CNA and Boardmans, the JD Group has taken over rival Profurn and Massmart has acquired Jumbo. Ellerines is in the closing stages of its merger with Relyant.

The investment community is taking a closer look at the retail sector now that companies are being better run, have better economies of scale and are supported by consumers willing to spend.

While Stockigt is positive on the outlook for the sector, he is concerned that too much credit can be extended to consumers, leaving them in a debt trap.