Clothing retailers: little Christmas cheer

By Ray Mahlaka for Moneyweb

Consumer spending remains in the doldrums in SA, with rising living costs increasingly weighing on purse strings.

This has been evident in the poor sales updates posted by major retailers –  with the clothing category showing more strain than food.

In the second quarter of this year, real (inflation-adjusted) household consumption expenditure – a key driver of economic growth – grew by a pedestrian 1% after a contraction of 1.7% in the previous quarter, latest figures from the Reserve Bank show.  Household consumption growth, which accounts for more than 50% of SA’s GDP, has muddled along since the 2008 financial meltdown.

At the same time, consumers’ disposable income continues to be eroded by a pile of debt from unsecured lending to store accounts, mostly felt by the lower-to-middle income segment that is also facing rising unemployment.

Underscoring consumers’ love affair with credit is that household sector debt-to-disposable income ratio has risen since 1995 from 57% to 76.6% for the first quarter of 2016 – it’s too high for comfort.

These are the consumer headwinds that retailers are up against as they attempt to eke out growth in a worrying economy that is growing at a glacial pace.

As Chris Gilmour, an investment analyst at Absa Wealth & Investment Management puts it: “Consumers are facing intense pressure. Their spending is under pressure, probably more than ever.”

Fashion retailers suffer

Fashion retailers are more vulnerable during tough times as consumers typically prioritise the spend on food rather than discretionary income-dependent items such as clothing, furniture and appliances.

Although most clothing retailers grew sales, this is undermined when stripping out inflation and effects of new stores, resulting in negative sales growth for many counters.

Even market darling Woolworths, which has long been shielded from gloomy retail times due to its wide range of merchandise that panders to different LSM groups, is starting to feel the pinch.

In a grim trading update on Friday, Woolworths’ clothing and general merchandise business increased sales by 2% but is negative when factoring its selling price inflation (a key metric to measure the price movement of merchandise) of 7% and new store space growth of 2.9% for 19 weeks of its financial year.

Sasfin Securities senior retail analyst Alec Abraham says Woolworths’ downbeat trading update was expected given consumer pressures. “Woolworths has held reasonably well because of its broad consumer focus. If you want to buy down, you can stay at the same store network. It also has high-end merchandise for higher LSM consumers,” Abraham tells Moneyweb.

Even retailers that mainly target middle to lower-end consumers such as Mr Price are feeling the pain. The no-frills retailer is feeling the pressure with pedestrian sales growth of 0.4% to R8.6 billion in the 26 weeks to October 1. Excluding space growth of 2.2% and selling price inflation of 11.4%, sales fell by more than 10%.

CEO Stuart Bird, who has been at pains to explain Mr Price’s poor showing, blamed an unseasonably warm winter and aggressive discounting by competitors for humdrum sales growth.

Bird says since April, its competitors have been discounting merchandise aggressively, sometimes by as much as 70% off the full price. Because of this, its competitors have profited at its expense.

The theory was that during tough economic times, consumers would trade down to Mr Price, putting the retailer in good stead compared to its competitors.

“Mr Price slipped on its niche of having fashionable clothes at an affordable price, but H&M and Cotton On have pushed into this space and are taking its market share,” says Abraham.

Credit sales

Other retailers have been hit by the turning credit cycle. The Foschini Group (TFG) and Truworths International, which have been traditionally reliant on credit sales, have been on the back foot due to the National Credit Regulator’s new affordability assessments, which seek to rein in reckless lending to increasingly indebted consumers.

TFG’s credit sales, accounting 40% of its total sales, grew by 1.4%. On the other hand, Truworths saw its credit sales (accounting for 70% of total sales) decrease by 1% for the first 18 weeks to October 30.

Clothing retailers have been benefiting from food retailers that have invested in price (the practice by retailers keeping prices low and accepting lower margins from fuel savings and supply chain efficiencies to remain competitive), resulting in consumers having more disposable income to buy clothes, says Abraham.

“Everything has against retailers,” says independent analyst Syd Vianello, adding that apparel retailers have run out of room to invest in price. “Retailers are moving to higher price points as their gross profit margins (a measure of profitability) are starting to decline. If this trend continues they are destined to make losses. Higher prices for merchandise is the new normal,” says Vianello.

There are few signs that there will be a recovery in the retail landscape even with the crucial festive season looming. As a staffer at a fashion retailer in Sandton City explains: “Christmas decorations at stores have been hung late, we don’t see much cheer this year.”

Author Ray Mahlaka for Moneyweb