The year hasn’t got off to a good start for the retail sector. After a great run in the second half of 2024, when the sector significantly outperformed the overall index, it seems as though shortly after lunch on Christmas day investors looked around and thought maybe there wasn’t that much going for consumers after all.
Even the darlings of the sector, such as Clicks, Lewis, Mr Price and The Foschini Group (TFG) have had a patchy start to the year. And it’s easy to see why. These are the shares that ran strongest in the second half of last year.
During 2024 investor sentiment swung sharply from tentative to optimistic; now as results and trading updates trickle in it’s evident that swing was overdone.
In a just-released note on the retail sector, Sasfin’s Alec Abraham says a host of factors bumped up sentiment in the last six months of 2024. “These factors ramped up the retail sector’s performance from +1.2% pre-election to +32.9% by the year-end versus +9.4% for the all share index from 0.2% pre-election,” he says.
The share price performances ran way ahead of sales, which were flat pre-election and rose on average 3.3% year on year following the election, says Abraham.
His “pick-six” factors behind last year’s strong sentiment were “a 15% drop in the petrol price from its peak in May; the cessation of load-shedding since mid-May; the outcome of the national election in June; a half a percentage point drop in the prime interest rate since August; a welcome return to positive real wage growth in September on lower inflation; and the dopamine rush of withdrawals from the two-pot pension regulation change from September … just in time for Black Friday and Christmas”.
All in all, it wasn’t unreasonable to think pent-up consumer demand was about to be unleashed. But, no. While the recently released figures suggest some improvement it is hardly an “unleashing”.
Mr Price had a particularly bad start to the year, with its share price down 12% in January alone. It’s still up a steep 50% on the 12 months, but the recent trading update, with sales growth of 10.6% for the three months to end-December, wasn’t enough to reassure investors.
Things were a little worse at TFG, which dropped 13.6% in January, with investors unpersuaded by the recently reported 8.4% lift in sales for the three months to end-December. Mind you, the share price is still up 31% on a 12-month view.
Clicks is down 8% on January and up only 17.2% year on year. Again, the 8.7% increase in sales during the five months to January 12 wasn’t enough to sustain last year’s stronger sentiment.
For no obvious reason, Lewis bucked the weaker investor sentiment. It reported merchandise sales up 9.9% in the three months to end-December, which was in line with the other retailers, but after a brief dip its share price recovered and is currently 88% stronger than January 2024.
Consumer under pressure
Anchor Capital’s Mike Gresty describes the recent updates as “a bit underwhelming and not as strong and clear as had been hoped for”. He adds the market had run up on a narrative that pointed to increased consumer confidence, but says there hasn’t been much sign of that confidence.
“I think there’s a lack of appreciation of the amount of pressure the consumer is under,” Gresty tells Currency, referring in particular to administered prices. There has been some relief, but just enough to enable consumers to breathe a little, he says. He was cautious last year and is remaining so for 2025.
As is Abraham, who sees little reason to expect much improvement in 2025. It’s not just that he’s not expecting much interest rate relief, he points out that one of the major reasons for the dearth of consumer confidence is that the bulk of middle- and lower-income consumers are now considerably worse off than they were six years ago.
“While the inflation rate has abated,” says Abraham, “actual prices are much higher than pre-pandemic levels due to the cumulative effect of high inflation for a couple of years.”
Food prices are currently 40% higher than they were in 2019, Abraham tells Currency, electricity 68% higher and medical insurance 43% higher.
The only thing that hasn’t actually gone up that much is, yes you guessed it, wages. The average nominal wage increase since 2019 has been a meagre 26%.
Without tangible structural progress from the government of national unity, retailers will have to deal with lacklustre volumes in 2025, when the recent cyclical tailwinds abate, warns Abraham. And without inflation to bulk up their top lines, food retailers will need real volume growth to justify their valuations.
As for apparel retailers, without steady improvement in consumer incomes, it’s difficult to see how they will be able to justify their near-peak valuations, says Abraham.
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