Chris Gilmour on how the retail sector is faring

Independent analyst celebrates food retailer Shoprite, which is apparently leaving Pick n Pay in ‘the middle’.

FIFI PETERS: We are now going to explore the financial health of the consumer; this means digging deep into their pockets and looking where they are spending and how much they are spending. We have this information based on data that provided from Stats SA.

The reason why this is so important is because this data can provide very informative clues for investors on the JSE who are looking to see where the value in the retail sector is, and which stock they should be putting into their shopping baskets to increase the value of their portfolios.

We’ve got independent analyst Chris Gilmour joining us on the Market Update. Chris, I don’t know if it’s Merry Christmas, Happy New Year or Happy Easter for 2021 – all of that jazz is in order, because I haven’t spoken to you in a minute.

CHRIS GILMOUR: It’s been a long, long time, Fifi. It’s well over a year; but any of those will do. In the meantime you can refer to Statistics South Africa as Stats SA. That’s the easiest.

FIFI PETERS: I think so. By the way, it really is great to have you on the show. Where are you talking to us from?

CHRIS GILMOUR: I’m talking to you from the far north of Scotland, but I’m coming out to South Africa in about two weeks’ time, so coming back to the ‘homeland’, yes.

FIFI PETERS: Oh, lovely. I look forward to seeing you. More importantly, let’s talk about this retail sector and the results that we have seen from the companies of late, and where you think our money should be, just based on the numbers.

Perhaps begin with Truworths, given the blockbuster sets of results that they reported today.

CHRIS GILMOUR: Okay. Truworths is a fascinating one because, in terms of actual market share, in terms of top-line growth, virtually nothing. In fact, they probably went backwards in terms of market share, but they dramatically increased their operating profit margin from 20.5% to 26.5%.

That is phenomenal. That’s almost unheard of in retailing terms – to increase your operating profit margin in one fell swoop by that amount. It means that the number of markdowns probably wasn’t nearly as big as it was in the past – and one was in a period of very, very buoyant trading conditions.

Read: Truworths reports record half-year profits

That’s takes me to Stats SA’s figures for November and December. They really were crackerjack. They were absolutely phenomenal – 2.7% growth that was adjusted in November, and 3.1% year-on-year growth in December.

Truworths share price

If you look at 2021 as a whole, for clothing and footwear, textile and leather, CFTL, the section which Truworths and Mr Price and TFG are in, that increased by 19.2% and it contributed almost half of the total growth in the retail space for 2021 as a whole.

Now 2021 didn’t quite get back to 2019 levels. It fell a little bit short if you look at the overall sales in 2015 in constant-currency terms. Nevertheless it was very strong indeed. The clothing market, the CFTL market, is particularly strong. I’m not entirely sure what’s driving it, apart from pent-up demand. People are sick and tired of wearing sweats and stuff like that; they want to go out and buy stuff, they want to get good-looking clothing again.

That’s probably why Truworths and maybe a few others were able to take advantage of such buoyant conditions, particularly in the last couple of months of the year.

FIFI PETERS: I wonder to what degree there may be other factors like the easy access to credit, and the fact that we have seen an extension in the Covid-19 relief grants, that have driven it. Or maybe, even thinking bigger, the number of people that lost their jobs in this time, unfortunately perhaps cashing out pensions to go and buy things that they shouldn’t have. I don’t know.

But what I want to know is, in the textiles, clothing and footwear sector in which some of the JSE-listed players play, which retailer would you be putting your money on, on the JSE?

CHRIS GILMOUR: There are two I fancy. One is Mr Price and the other one is TFG for a very simple reason. Again, if you look at the numbers and you look at the market share that both of these companies have made, they’re really quite startling. It’s not organic growth, this is a acquisitive growth. Both of them had the intestinal fortitude, the guts, to actually go out and buy at the depths of the pandemic. In TFG’s case it was Jet, and in Mr Price’s case it was Yuppiechef and then Power Fashion. Both were very, very clever acquisitions and TFG is held in very, very good stead.

So I say if you look at the kind of figures we’re talking about here, they’ve done phenomenally well as far as market-share gains are concerned. I think that’s going to continue. While Truworths is great, they’ve done fantastically well in terms of operating-profit improvement; [but] in terms of growing the top line they’ve hardly grown at all.

FIFI PETERS: Shifting out of clothing and looking at the pharmaceuticals and the medicines and cosmetics and toiletries and stuff, I’m looking at the Stats SA figures. We can see that there was quite a lot of buying from the consumer in that space as well last year. I’m interested in your take on the players that dominate this space. I think mainly of Dis-Chem and Clicks on the JSE, Which would be your pick? I think recently we had some numbers coming out of Dis-Chem, which the market thought were okay, but indicated that they expected better.

CHRIS GILMOUR: You make a very good point. I’m always very conflicted when it comes to Dis-Chem because as a consumer I love it. I think it’s the most fantastic destination-shopping experience. I’m sure when you go to Dis-Chem you come out with far more than you actually bargained for, because they are just such clever merchandisers. It’s so clever and the prices are incredible. And yet, if you look at their earnings over the past five years since being listed, [the earnings] are not just pedestrian, but incredibly poor.

Read: Trading update: Dis-Chem sees double-digit revenue growth

Clicks isn’t an awful lot better, yet both of them are sitting on PEs close to 40 times. I’m really quite amazed at this. It’s quite incredible that both are in a very defensive sector. You’re always going to have people being ill. I think they’ve proven their worth during this pandemic, they’ve really stepped up and come to the plate, and it’s been great having them in terms of being able to offer vaccinations and the like. Nevertheless there’s a price for everything and frankly I think both [the shares] are hideously overpriced.

FIFI PETERS: Okay. What about the guys that provide the goods that we need to live – food? It’s interesting to see the buying patterns there because the food sales, negative in July, were coming back into positive territory as the months went ahead, but finishing December coming in at around 1% in terms of the increase. In the food space which retailer would be your pick?

CHRIS GILMOUR: No contest – It’s Shoprite every time. This has really demonstrated its worth. I think Pieter Engelbrecht, the current CEO, inherited a real baptism of fire when he took over a few years ago. Whitey Basson left of the company in good good shape, don’t get me wrong, he left it in very good shape. But, as I said, it was a baptism of fire.

There were a whole bunch of things with which [Pieter] had to contend – robberies and this, that and the other. He has done a phenomenal job, pulling out of large chunks of Africa, which is where they were hitherto getting a lot of their growth. Still, it’s intact.

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They’re so clever. Shoprite are accessing growth at the top end of the market, taking Woolies head-on and they’re winning. They are also getting growth at the bottom end with the actual Shoprite chain at the low end of the market. They are leaving Pick n Pay to the middle, and frankly they’re welcome to it.

FIFI PETERS: Not to mention the stores that they’re snapping up from Massmart in that transaction.

Chris, we’ll leave it there for now. I know there’s quite a lot more to talk about, but we are out of time. We’ll see you and perhaps talk to you in two weeks, when you come to the country. That was independent analyst Chris Gilmour.



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