The profound disruption of lockdown dominated a slew of results and updates released by local apparel retailers over the past week.
Yet shares in Truworths and Mr Price, in particular, have surged, gaining 20.6% and 19% respectively over the past seven days.
TFG is up almost 10%, Clicks has gained close to 9% and even Dis-Chem, the laggard, is still almost 7% to the good.
So are retailers emerging from the worst of the pandemic’s ravages?
They had a disastrous second quarter but have stabilised at a manageable level, says Richard Cheesman, senior investment analyst at Protea Capital Management.
They’ve cut back on costs, and been helped by rental relief and better rental terms. The lowest interest rates in SA history have been a boon, especially for companies carrying higher debt.
Cheesman is optimistic about the prospects for retailers with a value proposition for customers, a solid balance sheet and more essential merchandise.
But he’s leery of those companies that sell higher-priced items and carry big credit books.
Investors need to pick their stocks carefully, he says: companies like Pepkor, for example, as well as pharmaceutical and food retailers.
"Mr Price is in a better place than TFG and that’s reflected in the rating. It’s a cash retailer, and hasn’t done substantial M&A."
While Mr Price’s seeming lack of ambition outside of its home market might have counted against it a few years ago, it’s now a plus.
"I would be more concerned about Truworths and Woolworths’ businesses outside of the food division," says Cheesman. He’s also wary of European and UK apparel retailers, and local stocks with exposure to those areas.
This week’s rally hasn’t erased the year’s losses, however.
At the start of 2020 TFG was trading around R130 a share. It dropped to a low of R54 in July, and is now hovering at R95.
In January Mr Price traded at around R180, then sank to R100 in March’s market sell-off, and is today at about R145.
Casparus Treurnicht, portfolio manager at Gryphon Asset Management, says there’s been a fair amount of foreign buying in the retail sector, and local asset managers are realising this. "What this is telling you is that retail will probably recover quicker than other sectors. We’ve seen this time after time … just when you think Mr Price is knocked over it bounces back."
But Treurnicht admits that it’s all relative.
"Investors are starting to realise these companies are trading at relatively cheap valuations compared with everything else. It’s more of a relative game, and they’re still paying dividends. Where else in the world will you get a return?"
He says a second wave of Covid-19 in Europe and the US might actually push investors into emerging markets like SA.
"You need to invest somewhere and bonds won’t help you because they’re earning negative rates."
And while food retailers are considered more defensive investments, clothing might benefit from a stronger rand.
Pharmaceutical stores, including Clicks and Dis-Chem, have held up best over the year. But Treurnicht says they’re expensive, and he expects competition in the sector to pick up.
Last week, TFG posted its first headline loss in at least two decades, of R221m for the six months to September. Group revenue fell more than 15% to R13.9bn as lockdowns and lost trading hours knocked performance domestically, in the UK and Australia.
The owner of Foschini, Markham and @home was particularly hard hit in the UK and Europe, where Covid-19 has had an extremely negative impact on consumer foot count and confidence. TFG closed 148 outlets within TFG London and TFG London’s turnover plummeted 56% for the period.
TFG London includes Phase Eight, Whistles, and the Hobbs brands in the UK. CEO Anthony Thunström has not ruled out further closures.
Cash turnover for the group fell 23% while credit turnover dropped by 34.7%, after being "purposely restricted". But there was an increase in cellphone and homeware sales.
Asked if TFG is through the worst of the pandemic, he says: "I am hopeful that SA has managed to get Covid-19 under control and that there will be no need to regress to further lockdowns." The impact of lockdowns on unemployment has, he says, been disastrous.
Of Australia and New Zealand, which have had success in restricting infections, Thunström says their business will "continue to trade strongly and show positive growth".
But the UK and Europe "remain our biggest concern and we expect the recovery to take longer than elsewhere".
Meanwhile, Truworths’ retail sales for the 18 trading weeks to November 1 fell 10% to R5.7bn.
Like TFG, its stores in the UK were under pressure, with more lockdowns and consumer uncertainty.
Truworths CEO Michael Mark says it’s difficult to quantify the effect of the second UK lockdown on its Office brand.
Retail sales for Truworths Africa, which is mostly the SA business, fell 9% to R4.2bn.
Mr Price says headline profit will drop between 23% and 28% for the six months to the end of September against the comparable period last year.
Treurnicht, for one, isn’t buying the idea of the retail rally.
"I won’t be buying retail, especially after this run over the past few days. From a demand perspective you have consumers who’re increasingly under pressure, so long-term risks are to the downside. We need a miracle if consumers are going to be emptying their purses at stores again. Currently it’s for the wrong reasons."
Doubts over Dis-Chem
Pharmacy group Dis-Chem is branching out — but not everyone’s convinced that its growth plans are sensible.
The pharmaceutical retailer is in the process of buying a community-based pharmacy group and an asset with specialisation in health-care insurance, both of them as yet unnamed.
While some are worried that Dis-Chem is venturing into arenas it has no experience in (health-care insurance) and taking on too many new ventures at the same time, chief financial officer Rui Morais says this is not the case.
Morais says Dis-Chem will be taking a minority stake in the health-care insurance business and will not be involved in day-to-day operations. The business the company is looking at offers gap cover and “psychological wellbeing”.
And Dis-Chem says a shift to community and convenience locations is not about changing its business model.
Rather, Dis-Chem already has shops in most big-destination locations.
Rival Clicks has 74% of its stores in convenience and neighbourhood shopping centres.
“We’re well-represented in super-malls and regional malls; we’re in 95% of those malls. What that means is that all our new opportunities come from community or convenience-based centres,” says Morais.
Both the acquisitions, as well as its R430m purchase of Baby City a few months ago, have been a long time coming, he says.
Dis-Chem is keen to control the three biggest costs in primary medical care: medicine, nurse or clinic-led services, and GP visits, which it has access to as a function of telemedicine.
“It’s part of the supply chain we feel we can benefit from. We get the benefit of higher margins, we can be involved in benefit design and it allows and ensures foot count through our stores,” Morais says.
He says there are about 12.5-million South Africans who are employed but not covered by health insurance, “and that’s a good opportunity”.
Health insurers differ from medical schemes in that medical schemes have to offer prescribed minimum benefits and are more costly. Morais says the health-care products of the business being bought range from as little as R100 (with limits in terms of GP visits) to options that cost customers between R400 and R500 a month.
Unlike Clicks, Dis-Chem has held on to its interim dividend as it considers further acquisitions.
Headline earnings rose 16.2% to R309.6m, while group revenue grew 8.1% to R12.8bn. Covid-related costs came to R45.4m.
In the six months ended August, the group opened 23 new stores and one pharmacy.
Dis-Chem says it’s on track to open six more stores before the end of the year.
Casparus Treurnicht, portfolio manager at Gryphon Asset Management, says Dis-Chem historically has been about a destination, bigger-box rollout that caters more for affluent shoppers.
“It sounds like Dis-Chem is starting to change its business model, buying smaller stores — as if it’s a desperate attempt to get that market share as soon as possible.”
This, he says, is different from Clicks’s expansion. “Clicks is doing it organically. It’s setting up new stores and working with the same model it has been using for at least the past decade.”
Treurnicht is clearly worried that Dis-Chem is doing too much at once. “There are a lot of moving parts, and that’s raising a little bit of a warning. Management is starting to not just do a lot of things at the same time, but a lot of different, new things at the same time.
It’s a bit concerning … we will have to wait and see.”
The problem is that Dis-Chem is already expensive: it trades on a p:e of 26. That means the share has a long way to fall if things don’t pan out as management would like.
Richard Cheesman, senior investment analyst at Protea Capital Management, points out that Dis-Chem’s retail operations went backwards but the wholesale business swung to a small profit. He’s flagged Dis-Chem’s diminishing disclosure as a worry.
For example, it did not reveal its retail inflation, whereas Clicks did.
Cheesman says when Dis-Chem listed it was seen as a more entrepreneurial and faster-growing version of Clicks, “but the quality of Clicks has been proven, while Dis-Chem has struggled to string together more than a couple of periods of good results.”
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