Betting on retail bounce-back
SA's fashion retailers, battered by the strict early lockdown measures to curb the spread of Covid-19, face a long road to recovery, but some will bounce back faster than others, presenting an opportunity for investors.Momentum Securities head of research Stephen Meintjes said this week the current cold snap should provide a fillip to clothing retailers, but warned that overall, a "lot of people would have probably decided they can do without new clothes for a while".Meintjes said this trend was already evident just before lockdown when consumers were buying food and other essentials instead of discretionary items such as additional clothing.But even with a likely uptick in clothing sales this week due to the cold snap, retailers face continued weak demand and an oversupply of stock.One retail analyst, who could not be named in line with his company's policy, said clothing retailers were "overstocked globally"."Northern hemisphere retailers have lost their spring/summer season due to the lockdowns and are now looking to exit their stock. It's likely a lot of this will be dumped in southern hemisphere emerging markets, which is going to mean there will be a lot of cheap clothing around for the next three to six months," the analyst said.This would bring more pressure to bear on local retailers, which will have to compete on pricing.But for investors there may be an opportunity.FNB portfolio manager Wayne McCurrie said that, overall, retail shares are priced "very well", even considering the weak trading environment they are operating in.If you took a positive view of the economic recovery over the next two years and if the government introduced appropriate structural reform, the economic growth rate would "pick up a lot from this very depressed level".TFG is a favourite stock among some analysts, with Meintjes saying the owner of the Foschini brand was "efficient" and well run and should be poised to perform better than others.Independent investment analyst Chris Gilmour said TFG is "probably best positioned as it has the biggest footprint of any clothing retailer in the country" ."There are more TFG outlets than there are post offices in the country. It's incredible. Bear in mind, though, a lot of these would have taken a lot of strain from April and May. "What has saved TFG and differentiated them over the years has been their highly successful venture in Australia. That has worked out beautifully for them. TFG has gotten it right. In Australia, there wasn't a severe lockdown like there was in SA, so TFG will be better placed than most of them."Gilmour said another factor that sets TFG apart is its strong online strategy.Another pick for Meintjes was Pepkor, which owns Pep and Ackermans. He said these brands, which cater for lower-LSM consumers, could benefit from a "lot of people trading down".However, Meintjes said this sector would also experience some pain because a "lot of people may just not have jobs or money" due to the economic fallout from the pandemic.Gilmour said Mr Price, which was the "best online clothing retailer in SA by far", would have been positioned to perform well during lockdown. Mr Price's "positioning was exquisite" as it catered for the lower end, which should benefit as cash-strapped customers look for value. Edcon had arguably been the hardest hit by the Covid-19 fallout, but Gilmour said the outlook could improve for the iconic retailer if buyers were found for parts of its business."It [Edcon] is going to survive in one form or another. What form it will take we have no idea, and whether [CEO] Grant Pattison is going to be part of it, we don't know."Gilmour said Woolworths and Truworths could take some strain but this was due more to strategic errors than to Covid-19. Woolworths had made mistakes for a number of years as far as its clothing merchandising was concerned, getting the mix wrong in some cases. Truworths, although a well-run business, had also made some missteps with its disastrous move into the UK about five years ago, he said.McCurrie said TFG probably offers the best value of all the clothing retailers at R77,42 while he thinks Mr Price, which is trading at R145,32, is "quite expensive".His top picks include TFG and Truworths.Ron Klipin, a portfolio manager at Cratos Asset Management, said "affordability and a lack of disposable income" are the most pressing issues facing consumers and that one of the better-placed retailers is Mr Price, because of its diversity. "Apparel and sports would be winners here."Klipin said although he likes parts of Pepkor, such as Pep and Ackermans, the group may be too diverse and would have been better served being more focused on clothing operations in the lower end of the market.The analyst who declined to be named said retailers that are going to come under "severe pressure" are the "mom and pop" stores, and they will likely give up market share to the bigger, listed fashion retailers which "have the balance sheets to get through this crisis".The concern was what this would mean for malls - "it's not pleasant to shop in a mall with lots of boarded-up shops", the analyst said.