On a macro level, local retail isn’t a great place to play. The unemployment rate is through the roof, consumers are under pressure from inflation and interest rates are on the rise.
When it comes to individual stocks, performance can (and does) vary wildly among players in the market.
Truworths is a great example. On January 21, the company released a lethargic sales update, noting that group retail sales for the 26 weeks ended December 26 2021 increased only 2%. Part of the problem is that the product mix was deflationary in the period, with prices dropping by 2.4%. Life becomes difficult for retailers when input costs (such as electricity and wages) increase and selling prices decrease. Only growth in volumes can save the day.
The update did note that headline earnings per share (HEPS) would be up by between 29% and 34%, which looked odd against the sales update. There are so many distortions in accounting, even in HEPS, that it was difficult to get excited about this profitability when viewed against the sales result. Was the profit growth due to operational improvements, or to noncash accounting lines?
The market was cautious and the share price fell about 4.5% in subsequent days. But the last laugh was had by those who bought the dip or at least held until detailed results came out. At close on February 17 after detailed interim results were released, Truworths was trading nearly 11.5% higher than before the sales update came out.
As it transpired, the increase in earnings was for all the right reasons. Gross margin expanded by 210 basis points through lower promotional activity, which explains the relatively slow sales result (though volume growth wasn’t bad). The group actively chose to protect margins, a mature approach during the Black Friday and festive periods that are all about discounts. Truworths also made significant improvements to the balance sheet, unlocking working capital through reductions in inventory levels.
The trading space is being optimised, with a net decrease in space despite a net increase in store numbers. This implies that new stores are smaller than the ones being closed, reflecting changing shopping habits.
Speaking of those habits, online sales had another strong period of growth in Truworths Africa and there is plenty of runway, as online sales contribute only 2.2% of segmental revenue. In the UK, that number was 47%. Notably, online sales can be margin dilutive.
When it comes to individual stocks, performance can (and does) vary wildly among players in the market
Though there was a sharp correction on the day after results, Truworths is well ahead of competitors year to date at the time of writing.
The share price is up 18% this year, with TFG next at 13.5% and Mr Price at 9.2%. Pepkor is up only 2.4%.
Draw a five-year chart and the outcome changes completely.
Truworths is a disaster over that period, down 30%. TFG is also in the red, down 3.7%. Pepkor is the star with a 35.6% increase and Mr Price is up 28%. The word "star" should be used loosely, as these are not good numbers over a five-year period by any means.
Over longer periods, the macroeconomic realities are impossible to avoid. Value fashion (such as Pepkor and Mr Price) has been the right choice on a relative basis, as consumers have looked for cheaper clothing in times of pressure. Thematic investing works well over longer periods, with investors able to take a view on a consumer segment relative to another one.
But over shorter periods, market dislocations offer opportunities. The Truworths management team has pulled off a strong result at net profit level despite numerous headwinds, so the share price has regained ground faster than the others have kept going.
This is classic value investing, which seeks out the cheapest stocks in the sector and assesses whether there are reasons the share price might catch up with peers.
Roller-coaster ride
We have a similarly interesting scenario in grocery retail. Shoprite is by far the best performer over five years, up 19%.
Over the same period, Pick n Pay is down 28% and Spar more than 3%. The race is much closer year to date, with Shoprite up 10% and Spar up 5.7%.
Pick n Pay is down nearly 3.9%, struggling against the competitive juggernaut that is Shoprite. Shoprite is the market darling and the price reflects that, while Spar is the comeback kid after a nasty selloff in late 2021.
As for Pick n Pay, the multiple still looks expensive. The decision to buy the laggard in any industry cannot be made automatically; investors need to distinguish between cheap companies and those that can get cheaper.
Truworths has dished out punishment to anyone who went short after the sales update. Still, the retail industry is a treacherously fun place for those looking for volatility and swing trading opportunities.
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