Last year was a record year for most retailers, in terms of volumes of goods sold, earnings and dividend growth and reaching new share price highs. Ellerines CEO Peter Squires sums it up nicely: "In my 36 years of retailing, I've never seen such a buoyant market."
This sentiment is echoed by JD Group executive chairman David Sussman. "A fundamental change has taken place in the middle mass market; this cycle will persist until at least 2010."
There are two parts to the overall retailers sector: general retailers, characterised by durable and semidurable retailers such as Edcon, Ellerines, Truworths, JD Group, Foschini and Massmart; and food & drug retailers, typified by Pick 'n Pay, Shoprite and Spar.
The general retailers index rose by 74% during calendar 2004, blasting through its previous peak of 14 000 set in 1999/2000 and reaching 20 000 at the beginning of this year. Food & drug's performance, though strong, was not as strong as the general retailers'.
The reason is simple. As consumers get more disposable income as a result of tax breaks and lower interest rates, they don't necessarily spend more on food but certainly spend more on clothing, furniture and appliances.
Two new listings occurred in the sectors last year, Lewis Group in general retailers and Spar in food & drug. Both companies had been identified over many years by analysts as candidates for a listing.
Lewis is an old Cape-based furniture retailer with a formidable reputation. It still has the highest profit margin of any listed furniture retailer. Its former holding company, GUS of the UK, finally decided to list Lewis late last year. Spar was part of the Tiger Brands group for many years. Unlike most food retailers, it didn't own its own stores. It's more of a distribution business, supplying privately owned Spar outlets. The timing for both listings was excellent and they've enjoyed relatively buoyant share prices since listing.
Metro Cash & Carry, on the other hand, began disengaging from the JSE. The African part of the business, which includes SA, was sold off to Metro directors and a BEE consortium by way of a R1,3bn management buyout, leaving Metro's sole asset as a 60% shareholding in Australian-listed Metcash Trading. The company was renamed Metoz. More than likely this stake will be sold to Metcash Australia for A$2,92/ share and Metoz will delist from the JSE.
So, where to now for the sector? The answer depends on whether what is happening in consumer spending is a result of a structural change in spending or merely cyclical. Considering the substantial change in the demographic composition of consumer spending in the past 10 years, it's probably safe to assume that a structural shift has occurred. The emergence of an aspirational black middle class has altered the consumer spending landscape fundamentally.
Having said that, following the recent 50 basis point cut in short-term rates, the interest rate cycle may have bottomed and further growth in the sector will be predicated on a broader-based improvement in the economy.
If economists are correct in their assumption that interest rates have probably fallen as far as they're going to, the next move in rates will be upwards. That's not necessarily bad news for retailers, though it does remove a powerful growth engine that's been primarily responsible for driving the sector in the past few years. Much now depends on how robust the economy really is and how many jobs can be created. If finance minister Trevor Manuel is right in predicting GDP growth of close to 6% in the coming few years, then the retailers should continue to enjoy strong earnings growth, albeit not at the same rate as experienced recently.
Analysts are divided in their views as to what will happen to retail shares. Many believe the sectors have peaked and it's now time to take profits. Others, such as Investec Asset Management's Rob Forsyth, believe share prices are discounting about a 300 basis-point rise in interest rates over the next year or so.
