It's been a long time coming, but retailers have finally had a good year. And investors are getting back into the once-shunned sector.
The JSE's general retailers index has rallied to account for 90% of the value of the broad financial & industrial index, from 55% a year ago. The food & drug index, which includes blue chip Pick 'n Pay, mirrored the performance.
Retailers can feel somewhat lucky. A drop in tax rates for most consumers this year undoubtedly helped them open up their wallets. And somehow, consumers didn't take fright at the high inflation and interest rate environment . In the 1990s, that signalled retailers' fall from grace.
Though inflation looks remarkably healthier than a year ago, retailers have not yet passed on all food price decreases to their consumers - indeed, food sales was the most subdued area in the sector. But inflation expectations seem to have helped consumers grab the trolley for other consumer items.
Within the broad categories, clothing retailers had an excellent year, sales growth compared with the year before peaking in midyear at over 25%. Growth has since declined to nearer 5%.
Furniture sales growth continued to disappoint, being in negative territory for most of the year. This was a feature of the consolidation of the furniture retailing industry during 2002.
The first quarter brought some improvement in appliance sales, as retailers cleared overpriced merchandise from their shelves and the stronger rand made imported items substantially cheaper.
But it was also a year of mergers and acquisitions. Pick 'n Pay bought Franklins in Australia and the Boxer chain in SA. Edcon bought CNA for R130m, the RAG debtors book for R200m and Super Mart for an initial cash consideration of R70m. JD Group was finally permitted by the competition tribunal to acquire Profurn.
All the large-cap stocks in the sector performed well, especially Pick 'n Pay. CEO Sean Summers has challenged other food retailers by cutting margins to grow the top line strongly.
Since its last annual report, Pick 'n Pay's main competitor, Shoprite, has taken a R61m exchange rate loss, compared with a R52m profit in its previous interim. This overshadowed a good operating performance.
Massmart turned in a reasonable set of interim figures but warned of the effects of certain extraneous factors on future group profitability. Among these were the effects of the stronger rand on foreign-denominated earnings and on clearing of inventory bought at higher exchange rates. JD Group also mentioned the improvement in demand for electrical appliances in the first quarter of 2003, owing to the same effects. Still, Massmart's 2003 earnings are likely to be good. The company also deserves praise for its transparency.
Woolies, the second-largest retailer in the sector by market cap, increased interim earnings by almost 80%. The Australian Country Road operation remains a drag on profits but there are signs that it is turning around.
In terms of turnover, Metcash is by far the largest company in the general retailers sector. Most of that turnover comes from its Australian subsidiary, Metcash Trading Australia. It has taken three years, but Metcash is now on the right track in that country. Interim results were strong, though below some analysts' expectations.
The clothing retail sector has reinvented itself. Credit-risk management has been tightened up in all chains and merchandising and assortments are better across the board. These and other factors are making the sector less reliant on lower interest rates to improve performance. And the spectre of losses on consumer finance books is dissipating.
