JOHANNESBURG — A late and unseasonably warm winter, a volatile currency and political instability have been blamed for tepid retail sales at South Africa’s major retailers. The market has long been dominated by the big players — among them Woolworths, The Foschini Group, Truworths, Edcon and Mr. Price — all of which have posted disappointing results for apparel for the fiscal year ended June 30.
Mr. Price, in particular, has seen an alarming drop in its share price, which closed Friday at 14,700 rand, or $10.33, from a high of 29,333 rand less than a month before. Analysts remain pessimistic about a recovery in its performance. Momentum SP Reid retail analyst Alex Sprules said that operating conditions are unlikely to improve in the short term and “would continue to weigh on Mr. Price’s sales.”
The Foschini Group, or TFG, which includes the men’s wear brands Markham and Fabiani, reported sluggish same-store sales growth over the same period, slowing to 3.5 percent versus 5.7 percent the year before. TFG indicated that the results reflected current economic conditions, high inflation and interest rates in South Africa, combined with the weak rand, did not help to spur sales.
TFG’s overall performance, however, has been buoyed by its acquisition in May of the U.K. fashion chain Whistles, which is made up of 46 brick-and-mortar stores and an online platform. Whistles earlier this week named a new management team led by brand director Helen Williamson, managing director Justin Hampshire and creative director Nick Passmore.
The year before, TFG purchased another British women’s wear brand, Phase Eight.
South Africa retailers’ foray into global markets is part of their attempt to buffer themselves against the weak rand, with Australia and the U.K. proving fertile ground for brands with a solid share of the market. The Truworths group acquired 88.9 percent of the Office Retail Group, a British high-street fashion footwear chain, at the end of 2015, paying 256 million pounds, or $340 million, for the 162-store retailer with operations in the U.K., Ireland and Germany, as well as a web site that represents 20 percent of the group’s sales.
The acquisition of Office boosted Truworths’ full-year earnings. A statement released by the company indicated that group sales rose 46 percent to 17 billion rand, or $1.2 billion at current exchange. Office contributed sales of 3.8 billion rand, or $264 million, while operating profit increased 21 percent to 4.2 billion rand, or $291 million.
Michael Mark, Truworths’ chief executive officer, said, “The integration of Office is progressing well and we are aligning the business with Truworths’ retail philosophies, practices and systems. Our initial focus has been on optimizing stock management in the merchandising division.”
Analysts were unhappy with the results, however, which fell below projections. The Truworths portfolio, which includes brands such as Naartjie, LTD, Earth Child and Daniel Hechter, among others, had seen an increase of 11 percent for the same period last year; this year, retail sales increased by only 6.8 percent to 10.8 billion rands, or $750 million. As a result, the retailer’s share price plummeted 8.2 percent soon after results were reported. On Friday, shares traded at 7,249 rand, or $5.10.
While Office has certainly boosted earnings, the Brexit vote has thrown a wrench into the works. Mark said, “The trading environment in the United Kingdom is also faced with uncertainty after the decision to withdraw from the European Union.”
Woolworths has fared much better, with the acquisition of David Jones in 2014 bolstering results, but the performance of its Country Road unit has been disappointing. At the end of August, the South African retail giant reported an after-tax profit of 4.35 billion South African rand, or $30 billion, representing a 40 percent increase from last year.
Woolworths ceo Ian Moir admitted that trading conditions were challenging, what with the entry of Northern Hemisphere retailers — not to mention their aggressive promotional activities — offering similar value propositions in a very competitive market.
“Trading for the first eight weeks of the new financial year has seen an improvement in South African clothing after a disappointing winter season,” Moir said when results were released, adding that there were “good sell-throughs of the new range.”
Country Road Group sales, however, “are flat on last year and we continue to focus on executing our turnaround plans.”
Moir attributed a 3.9 percent drop in Country Road clothing sales to the unusually warm winter season in the Southern Hemisphere — even Australia experienced high temperatures during the winter months.
While a private company since its acquisition by Bain Capital Ltd. for 25 billion rand, or $1.7 billion at current exchange, in 2007, Edcon, South Africa’s largest non-food retailer, is not required to publish its results but has fared the worst compared to its fellow retail giants. For the third quarter (which ended December 2015) of the financial year, Edcon, whose flagship department store is Edgars, reported that sales had declined by 1.7 percent to 8.68 billion rand, or $602 million, while trading profit dropped 17 percent compared to the previous year. While cash sales increased by 4 percent, credit sales decreased by 9.9 percent. Credit sales make up over 30 percent of all sales.
In a positive development amid the disappointing results, Edcon has since been able to secure support from its bondholders and lenders to obtain 1.5 billion rand (approximately $104 million) in bridge financing, said ceo Bernie Brookes.
The overall trading environment remains challenging, however. Edcon’s third-quarter report attributed this primarily to “higher income taxes, rising unemployment, rising interest rates and a sharp depreciation in the rand. Household income growth continued to be affected by these factors and consumer confidence declined close to its lowest point in 14 years during the quarter as reported by the Bureau for Economic Research.”
Moir was equally cautious about Woolworths’ prospects. “As a result of the deterioration in the outlook for the global economy, conditions are expected to become more difficult in both South Africa and Australia. Increasing interest rates in South Africa will add further pressure on the local consumer.”
Mark echoed the same sentiments on behalf of Truworths. “We expect the South African trading environment to remain challenging during the 2017 financial period, with slow economic growth and rising inflation putting pressure on consumers.”
New credit regulations do not help the situation, he added. “The continued impact of the new affordability regulations remains a concern as, in our opinion, it unreasonably restricts our ability to open new accounts and grow credit sales. They also have the effect of denying access to credit to many otherwise creditworthy customers.”
The new Affordability Assessment Regulations, or AAR, part of the National Credit Amendment Act, became effective in March 2015, along with the amended National Credit Act Regulations, thereby making South Africa’s credit arena one of the most stringent and regulated in the world, according to tax advisers and auditors KPMG. Regulators insist, though, that the new rules were needed to cut the amount of household debt in South Africa.