Where next for retail?

Presenter: David Williams Guest(s): Syd Vianello

Retail is a great sector to be in over the past couple of years because just when it looks like it can’t possibly continue to grow any longer - it grows even faster! With Syd Vianello, retail analyst at Nedcor Securities

DAVID WILLIAMS: Syd, let’s have a look at this last year where we’ve seen some companies that a year ago we said: "This can’t continue!" They’ve just grown and grown and grown - what’s your assessment of the year?

SYD VIANELLO: It’s been an incredibly good year - I must be honest, I didn’t expect that this spending spree would continue as long as it has. I recollect making a speech to the board of directors of a retail company associated with the retail trade - and we’re going back to about February 2005 - and I said that things such as growing consumer debt, and the cost of servicing that would ultimately start affecting the spend. I hate to say it, but I was wrong - the spending spree has continued, and it really has been an exceptionally good year. Obviously with the numbers coming out indicating the true strength of the economy - I was listening to one of your first speakers this evening talking about the way he calculates the underlying strength of the economy by looking at UIF payments - it’s clear that the original assessment of the SA economy at the beginning of the year was hopelessly wrong, and this economy has been a lot stronger than anyone ever anticipated.

DAVID WILLIAMS: Then the question that arises is which are the companies and shares that are actually going to outperform a performing sector?

SYD VIANELLO: The way I see it at the moment - I think the credit-based apparel retailers in particular are performing exceptionally well - it appears as if they are continuing to gain market share at the expense of apparel retailers operating in the cash market. It’s interesting if you look at the Retail Liaison Committee (RLC) numbers - which I think provide a far more accurate assessment than government statistics - if you look at the overall growth in apparel sales over the last few months, and compare that growth rate with growth rates being recorded by the credit based apparel retailers, its pretty clear that the gap between the growth in credit versus the growth in cash is widening. So if you ask me where the real growth has been - it’s on the credit side. If you ask me where it’s going to continue to be - I’d still think it’s going to be on the credit side.

DAVID WILLIAMS: That fits in with what the big retailers are saying - that their bad debts are no problem…

SYD VIANELLO: I think it was early last week the quarterly Moody’s assessment of a company called On the Cards - a special purpose vehicle (SPV) established to managed Edcon’s debtors - was posted on the RMB website. The level of delinquencies, and the overall assessment of the Edcon On the Cards book is incredibly good - it is as good as it was a year ago, and there appears to have been zero deterioration whatsoever in the quality of that book. That just shows you what’s going on out there.

DAVID WILLIAMS: Is that a function of more people borrowing, so there may well be more people defaulting but as a proportion of the total it hasn’t risen - in other words there are more people with access to credit?

SYD VIANELLO: There are more people who have access to credit - interestingly the average balance outstanding on credit accounts appears to be rising in line with the overall growth in consumer income - so there are more people out there who are eligible for credit and who are taking up the credit option. Obviously to go into greater detail - to say where the delinquencies are in the delinquencies that do exist - nobody has provided any definitive data as to whether its in the existing accounts, or the new accounts. I really think there’s any specific concentration…

DAVID WILLIAMS: Beyond the retail sector - if someone is looking across the different sectors - is retail still a good thing to get into as an investor?

SYD VIANELLO: If you’re careful where you put your money I think there is still great value in certain parts of the retail sector. I like the credit based apparel retailers, and interestingly the credit based furniture retailers continue to perform fairly well too. I think an interesting development - or potential development early next year - is going to be what happens to food prices, particularly at the bottom end of the market. We’re talking about the staples where a knock-on effect on certain manufactured or processed products such as poultry and meat - maize prices are rising, we appear to be in for a drought and this year’s crop doesn’t appear to be as large as what was originally estimated - so I guess around March 2006 we’re going to see increases coming through in the processed food sector. Before that - early in 2006 - we’re going to see increases in basic staples. That does have a knock-on effect on how people at the bottom end of the spectrum spend their money - obviously the main beneficiaries will be those retailers in the food sector, operating in that market. Of course there is one retailer that springs to mind immediately, and that’s Shoprite - I would single them out as being a potential beneficiary simply because they should experience much faster growth in turnover than what they’ve experienced to date.