Retailers expecting jolly Xmas

South African retailers are expected to enjoy a better Christmas this year, thanks to easy credit and low interest rates.

This means breaking total retail sales of R73-billion recorded in December last year, up from R65-billion in 2010. Statistics South Africa data shows a significant spike in retail sales over the festive shopping season every year.

Retail sales growth surprised on the upside on a year-on-year basis in August. In terms of the 6.4% year-on-year increase, the highest annual growth rates were recorded for retailers in textiles, clothing, footwear and leather goods; those in hardware, paint and glass; and retailers of household furniture, appliances and equipment.

Consumers seem to be in reasonable shape despite the slowing economy, said Chris Hart, senior economist at Investment Solutions. G rowth for this year has been revised downwards from the budget forecast of 2.7% to 2.5%.

"The festive period will not be muted for the retail sector. While consumers are under pressure, they continue to borrow," said Nicholas Sorour, portfolio manager at Sasfin Securities.

"A general feeling after the government assurances is that there won't be a [credit] bubble."

Unsecured lending has become a subject of much debate after growth was revised lower on struggling European and US economies, and slower growth from China.

The Treasury has been talking to banks and retailers to rein in debt.

Unsecured lending accounts for 9.6% of total lending, which is R1.36-trillion for the period to June.

Statistics showed unsecured loans amounted to R131.3-billion, almost three times the R45.2-billion recorded in June 2008.

Mia Kruger, portfolio manager at Kruger International, said she did not expect concerns over high consumer debt to slow sales much this festive season.

She cautioned that even though retailers have managed to increase their sales and grow their earnings, valuations look stretched.

"Currently, both the food and clothing retailers trade at price-earnings levels of around twice their five-year averages. These figures imply that earnings have to double from their current levels in order for prices to be justified."

Investors have moved out of resource shares as commodity prices have weakened on growth concerns and production problems, especially in South Africa's platinum belt, and into retail shares because of the promise of African expansion.

The JSE resources index has dropped 7% from a year ago and has a price:earnings ratio of 10.66 while the bourse's retail index has a price:earnings ratio of 19.71.

Boosted by foreign investor support, the JSE general retail index has gained about 36% this year - more than double the broader all share index, which has grown 17%.

The best-performing retailer has been the cash-based Mr Price, which has rallied 74%. Woolworths gained 71%.

Africa's largest grocer, Shoprite, has gained 47%. Pick n Pay has underperformed its peers, losing 9%. The grocer has lost market share to its rivals and is facing criticism about its high cost base, outdated information technology systems, and labour issues that have led to lacklustre performances over the past few years. Pick n Pay reported a 34% drop in first-half profit driven by operational and cost headwinds associated with its restructuring plan, and cautious consumer spending.

South Africa's retail and consumer industry is facing a difficult and challenging business environment in the aftermath of the global economic recession, a report from professional services firm PwC revealed last month.

Challenges facing retail and consumer products companies include limited volume growth, increasing costs and falling prices.

According to the report, South African retail and consumer products outlook: 2012-2016, after a strong recovery since the financial recession of 2009 with retail sales surpassing R1-trillion for the first time in history last year, the industry is slowing significantly.

Volume growth for this year is expected to be just 0.7%, down from 3.9% last year.

"As pressures on consumers' wallets increase, retail sales by value are expected to slow this year. The economic outlook going forward is expected to be modest," said John Wilkinson, PwC retail and consumer leader in South Africa. - I-Net Bridge