In the local retail sector, a couple of names sit right at one end of the spectrum of discretionary vs nondiscretionary consumer spending. Cashbuild and Italtile have it tough because they depend on a combination that is rarely seen at scale in our country: first, consumers having money in their pockets, and second, being willing to spend it on property improvement or development.
We might have pockets of resilience in the retail sector, driven by such trends as the shift from informal to formal retail, but the DIY and building sector usually isn’t one of them. South Africa is infamous for onerous interest rates and tepid economic growth, which are anathema for companies with extensive retail (and especially manufacturing) footprints that are exposed to highly discretionary consumer purchasing decisions, such as redoing a bathroom or adding a room to a house.
Still, by the time you read this, Cashbuild should have released its detailed results for the 52 weeks ended June 29 2025. We have a good idea of what’s coming, with the fourth-quarter operational update having shown 5% revenue growth for the full year on a comparable 52-week basis (the prior period had an extra trading week). Encouragingly, a recent trading statement notes that headline earnings will be up between 7% and 12% for the year — and that’s without adjusting for the extra week in the base. That seems pretty good under the circumstances, which is why Cashbuild is my choice of the two.
The market seems to disagree with me, as the year-to-date move is down 29% in Cashbuild and “only” down 21% in Italtile. Admittedly the higher base for Cashbuild coming into this year is at play here, as the 12-month move is down 9% for Cashbuild and down 11% for Italtile. In both cases, the GNU exuberance has clearly melted away. But the surprise for me is that Italtile is only slightly worse off than Cashbuild. With Italtile having just released results for the year ended June 2025, we have fresh information to work with in assessing whether that makes any sense.
Credit to the Italtile management team: they don’t obfuscate the risks. This is a rare example of management commentary that tells it like it is, with no attempt made to sugarcoat the operating environment in which the company finds itself.
One issue is that South African demand for tiles is weak, with retail sales up just 1% year on year. Another is that competition is extensive, which means retail margins fell by 70 basis points as prices came under pressure. The winner here, of course, is the consumer, not that this seems to be making much difference to demand. Thanks to impressive cost control, retail profit for the period was up 1% at Italtile. Given the extensive franchise footprint, it’s also important to note a comment in the results that all the stores in the network remain profitable.
Overall, Italtile’s retail business is keeping it together, but the direction of travel is sideways. It has extensive exposure to the value market (CTM) and rural market (Top T), which means Italtile as a group is particularly sensitive to consumer indebtedness and overall interest rates. The premium offering (the Italtile brand itself) is less sensitive as its clients have more disposable income.
This is where Italtile has been sounding the alarm bells for some time, with extensive risks related to oversupply in the market
But now we reach the manufacturing business, where both turnover and profit before tax suffered a nasty blow. This is where Italtile has been sounding the alarm bells for some time, with extensive risks related to oversupply in the market. Imports are putting the squeeze on local industry thanks to dumping by key global trading partners. Compounding this issue, additional manufacturing capacity has been built in the Southern African Development Community, driving price deflation and thus margin pressures, while making other key markets in Africa more difficult to access for South African manufacturers. Locally, this is leading to market consolidation, which is just a nice way of saying businesses are closing down.
The net result is a cautious approach at Italtile in both the retail and manufacturing businesses. Its capex spend more than halved year on year and management has dished out dire warnings about deindustrialisation in South Africa.
Cashbuild doesn’t have the manufacturing exposure that Italtile has, which means that the risk profile of the business is lower and it has a better chance of maintaining and even expanding margins in this environment. It remains a mystery to me how the share prices are so closely correlated.
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