The JSE all share index rose by 43% in calendar 2005, making the 23% rise in the general retailers' index (GRI) look puny in comparison. The disparity was due to what institutional fund managers call "sector rotation" - moving out of a sector regarded as having seen its best days and into a sector or sectors still perceived to offer value.

During 2005 it was the resources stocks that benefited primarily from switch-out from consumer stocks like the retailers.

Extraneous factors like interest rates and tax cuts had a profound effect on the GRI during 2003 and 2004. When Reserve Bank governor Tito Mboweni began cutting short-term interest rates in mid-2003, it didn't take long before the consumer-orientated sectors of the JSE, like retail, began reacting positively. Combined with a number of tax cuts, the effect of interest rate reductions was to boost the spending power of consumers, which resulted in the earnings of retail companies rising significantly.

This promoted a virtuous circle as their share prices also rose substantially. Probably the best example was Edcon, whose share price rose from about R5 in mid-2003 to R35 at end-2005.

In contrast, the food and drug retailers - Pick 'n Pay, Shoprite and Spar - fared far better from a share-appreciation perspective, even though their earnings growth wasn't necessarily as good as many of the components of the GRI. Food and drug retailers managed a 37% rise last year, not far off the Alsi performance. Investors obviously preferred this sector as a kind of safe haven for their retail exposure. Spar was the best performer of the retailers in calendar 2005, rising by 44% during the year. Shoprite was on 42% and Pick 'n Pay was a relative laggard at 24%.

Though the earnings growth momentum of most of the retailers has slowed considerably, compared with the heady days of 2003 and 2004, it's still robust and likely to continue until interest rates begin moving upwards again.

It wasn't a wonderful year for furniture retailers in terms of share-price appreciation - Lewis was the best performer, rising 20%, and JD Group and Ellerines only just managed double-digit growth. However, they've all done better in the new year.

Ellerines finally consummated its merger with Relyant Retail and the group now covers the entire market quite evenly, from Ellerines and Town Talk at the bottom end, through Beares, Geen & Richards, Savells/Fairdeal and Lubners in the middle, to Wetherlys and Osiers at the top end of the market. CEO Peter Squires believes that, if electrical goods outlets are excluded from the comparison, Ellerines is now the largest furniture retail chain in the country.

The Ellerines amalgamation last year and the JD Group/Profurn merger of 2002 leaves just Lewis with a predominantly lower-end focus.

The furniture retail market has now consolidated to the point where further acquisitions/mergers would probably be prohibited.

One company, New Clicks, stands out as a dismal performer. Its share price went backwards last year, falling by 8%. Early in 2006, CEO - "group leader," to use his terminology - Trevor Honeysett retired and handed the baton to British import David Kneale. To be fair, many of New Clicks' problems in recent years were caused by factors beyond the company's control, like the inconsistent behaviour of the authorities towards pharmaceutical pricing regulation. But nevertheless, New Clicks is in a messy situation and Kneale has a difficult task ahead of him.

This year will be shaped by what happens to short-term interest rates and whether the consumer spending boom continues. Tax cuts will have helped the cash retailers.

How ironic that the two largest retailers by net profit - JD Group and Edcon - are two of the most lowly rated shares in the general retail sector. They've both been neglected by the market in the past year, while others have been rerated upwards. Edcon shares rose by 18% last year, and JD Group's by 13%.

JD Group is the largest retailer in the combined sector, when ranked by net profit. It earned R1,39bn last year, about R200m more than its nearest rival in the ranking, Edcon.

Much of JD Group's recent earnings growth has been due to the stellar performance of its electrical, or "plugged" goods, especially from its Hi-Fi Corporation chain of 20 stores.

According to Merrill Lynch: "The past few years saw the proliferation of new consumer technology at deflating prices. This resulted in booming volume growth due to early-cycle buying and replacement. We expect to see continued deflation in prices without the commensurate growth in volumes, and this should put pressure on margins at Hi-Fi Corporation. For the full year we expect operating margins to rise marginally from 17,7% to 18%, helped by credit margins rising, specifically in the mass market chains. For now this is negative for JD's investment thesis." The stockbrokerage is relatively negative on Edcon too.

"Edcon trades at a 12-month rolling p:e of circa 10, at a 20% discount to some of its clothing retail peers. This leads us to the conclusion that most of the discount relates to the perceived risks of the acquisition and growth strategy. We believe the catalyst for this discount to narrow in the medium term would have to be in the form of comfort around the sustainability of growth in the medium to long term."

Merrill Lynch expects bad-debt ratios to rise, as last year's growth in new accounts inevitably results in "growing pains" in the book. However, the key focus in financial 2006 results should be on trends rather than absolute bad-debt ratios.

"An increase in credit extension to the lower income segment post the clean-out of the book should result in better growth rates in the next few years from this segment."

Edcon CEO Steve Ross remains confident about the future. "The sustained high levels of consumer confidence, benefiting from low interest and inflation rates as well as from the further tax cuts announced in the recent national budget, together with accelerating job creation, will have a positive impact on consumer spending in the year ahead," he says.

Foschini, Woolworths and Massmart are numbers three, four and five in the rankings, with net profits of R683m, R666m and R626m respectively.

Foschini managed a very respectable rise of 31% in its share price last year. This group has diversified markedly in recent years and now covers most aspects of clothing retail, from sports goods to outdoors to fashion. And it's one of the few clothing retailers to offer a wide range of jewellery as well.

Woolworths' unique selling thesis of part food, part clothing and part homeware is far from being fully exploited, and the market is slowly waking up to this fact. As Woolworths gets its clothing ranges right, an ever-increasing number of its food shoppers will be attracted to buy their clothing there as well.

Massmart's positioning in the net profit ranking is a remarkable achievement for a company that's effectively been in existence for only 17 years. CEO Mark Lamberti will retire in mid-2007 and hand over to deputy CEO Grant Pattison. But its share price had a roller-coaster time last year, ending 16% up on the previous year.