Why I'm not hot on the South African retail sector

by , 22 September 2017
Why I'm not hot on the South African retail sector
The Foschini Group is down 10.54% in the last month, Mr Price 10.40%, Truworths 6.33%.

And Lewis crashed a whopping 16.70%.

If you're invested in retail, it's been a bad month for you.

But before you start buying into the sector because it ‘shows value' I want to warn you…


South African retail sales are dropping and you need to watch out for the fallout

In its most recent announcement Statistics SA revealed that “retail sales fell by 1.7 percent year-on-year in February after a 2.3 percent contraction in January, with general retailers, particularly clothing and furniture sellers recording diminished activity.”

Retail sales have been in a steep downtrend since 2016

Simply put, the falling retail sales aren't a once off blip on the radar.
They’ve been in a falling trend since 2016.
So why is this happening? Well, in 2015 and 2016 we saw interest rates rise. That means increased payments on home, car and short term loans.
This has caused a steady decrease in the spending power of South Africans.
Just as we thought 2017 would be a better year, come the junk status downgrades courtesy of the Zupta’s.
Now a decrease in the interest rate is completely off the cards.
Fuel prices have already increased. The rand weakened to the dollar, and while we’ve seen it strengthen somewhat in the past week, I still expect it to remain subdued in coming months.
If inflation kicks up from here, which would happen if the rand weakens even more from current levels, we could expect an increase in interest rates.
And that would be a massive negative for the retail sector. Especially credit retailers, companies like Lewis and Foschini that really make their money off clients ‘borrowing’ money from them to buy clothes and furniture.

Consumers are more negative than they were back in the 2008 financial crisis!

And if you think retail sales could soon kick up, I have bad news.
People aren’t buying, and they don’t plan to buy more in the near future.
You see, FNB tracks consumer confidence. That’s how positive people feel about the South African economy. The consumer confidence index has been a great indicator for showing growth (or contraction in retail sales, and the property sector).

Consumer confidence is sitting at its worst level in years

Right now the FNB Consumer Confidence index is sitting at -10.
The long-term average of the index stood at +4.
"The municipal elections boost likely faded during the fourth quarter, and the economic realities of weak household income growth, poor credit extension and soaring food prices once again exerted downward pressure during the festive season," said FNB senior analyst, Jason Muscat. Consumer Confidence in South Africa averaged 1.29 from 1982 until 2016, reaching an all-time high of 23 in the first quarter of 2007 and a record low of -33 in the second quarter of 1985.
In short, the only time in South Africa’s history that consumers have been this downtrodden was back in 1985, at what could arguably be called the worst moments of the Apartheid regime.
This surely is a sign of the success of Jacob Zuma’s government in destroying all that have been built up in South Africa since 1994.
And, unless we see political change with new hope for the people I expect the negative trend for retailers to continue…
Here’s to unleashing real value
Francois Joubert

Why I'm not hot on the South African retail sector
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