Chris Gilmour explains how the retail sector is doing


FIFI PETERS: We will now explore the financial health of the consumer; it means digging deep into their pockets and watching where they spend and how much they spend. We have this information based on data provided by Stats SA.

The reason this is so important is that this data can provide very informative clues to JSE investors looking to see where the value lies in the retail sector and which stocks they should put in their baskets to rise. the value. of their wallets.

We have independent analyst Chris Gilmour joining us for the market update. Chris, I don’t know if it’s Merry Christmas, Happy New Year or Happy Easter for 2021 – all that jazz is in order, because I haven’t talked to you in a minute.

CHRIS GILMOUR: It’s been a long time, Fifi. It’s well over a year; but any of them will do. In the meantime, you can refer to Statistics South Africa as Stats SA. It’s the simplest.

FIFI PETERS: I think so. By the way, it’s really great to have you on the show. Where are you talking to us from?

CHRIS GILMOUR: I’m talking about the far north of Scotland, but I’m leaving for South Africa in about two weeks, so I’m coming back to the “homeland”, yes.

FIFI PETERS: Oh, lovely. Waiting to see you. More importantly, let’s talk about this retail sector and the results we’ve seen from companies lately, and where you think our money should be, just based on the numbers.

Maybe start with Truworths, given the blockbuster results they reported today.

CHRIS GILMOUR: Agreed. Truworths is fascinating because, in terms of actual market share, in terms of revenue growth, virtually nothing. In fact, they probably fell in terms of market share, but they significantly increased their operating profit margin from 20.5% to 26.5%.

It’s phenomenal. It’s almost unheard of in retail terms – to increase your operating profit margin by just that amount. That means the number of markdowns probably wasn’t as large as it has been in the past – and one of them was in a period of very, very buoyant trading conditions.

Read: Truworths reports record half-year profits

This brings me to the Stats SA numbers for November and December. They were really crackerjack. They’ve been absolutely phenomenal – 2.7% adjusted growth in November and 3.1% year-on-year growth in December.

If you look at 2021 as a whole, for apparel and footwear, textiles and leather, CFTL, the section that Truworths and Mr Price are in, and TFG, which grew 19.2% and contributed nearly half of total retail space growth for 2021 as a whole.

Now, 2021 hasn’t quite returned to 2019 levels. It’s been a bit short if you look at overall sales in 2015 in constant currencies. Nevertheless it was really very strong. The clothing market, the CFTL market, is particularly dynamic. I’m not entirely sure what drives it, other than pent-up demand. People are tired of wearing tracksuits and stuff like that; they want to go out and buy stuff, they want to have nice clothes again.

This is probably why Truworths and perhaps a few others were able to take advantage of such buoyant conditions, especially in the last two months of the year.

FIFI PETERS: I wonder to what extent there may be other factors like ease of access to credit and the fact that we have seen an extension of Covid-19 relief grants, which have motivated it. Or maybe, even thinking bigger, the number of people who lost their jobs at that time, sadly maybe cashing in pensions to go out and buy things they shouldn’t have had. I do not know.

But what I want to know is that in the textile, apparel and footwear business that some of the JSE-listed players play in, which retailer would you put your money on, on the JSE?

CHRIS GILMOUR: There are two that I like. One is Mr. Price and the other is TFG for a very simple reason. Again, if you look at the numbers and look at the market share that these two companies have gained, they are really quite surprising. It’s not organic growth, it’s acquisitive growth. Both had the gut guts, the guts, to go out and buy in the depths of the pandemic. In TFG’s case, it was Jet, and in Mr. Price’s case, it was Yuppiechef, then Power Fashion. Both were very, very smart acquisitions and TFG is very, very well placed.

So I’m saying if you look at the kind of numbers we’re talking about here, they’ve made phenomenal progress in terms of market share gains. I think it will continue. Although Truworths is great, they have done wonders in terms of improving operating profit; [but] in terms of revenue growth, they hardly grew at all.

FIFI PETERS: Ditching clothes and looking at pharmaceuticals, drugs, cosmetics, toiletries and all, I look at the numbers from Stats SA. We can see that there was a lot of consumer buying in this space last year as well. I’m interested in your perspective on which players are dominating this space. I’m mainly thinking of Dis-Chem and Clicks on the JSE, which would be your choice? I think we recently received some numbers from Dis-Chem, which the market thought was acceptable, but which indicated they were expecting better.

CHRIS GILMOUR: You make a very good point. I’m still very conflicted with Dis-Chem because as a consumer I love it. I think it’s the most fantastic destination shopping experience. I’m sure when you go to Dis-Chem you get way more than you actually bargained for because they are such smart merchants. It’s so smart and the prices are amazing. And yet, if you look at their income over the past five years since they joined, [the earnings] are not just pedestrians, but incredibly poor.

Read: Business update: Dis-Chem sees double-digit revenue growth

Clicks aren’t much better, but both sit on PEs nearly 40 times. I am really very surprised by this. It’s pretty incredible that the two are in a very defensive sector. You will always have sick people. I think they’ve proven their worth during this pandemic, they’ve really stepped up and stepped in, and it’s great to have them in terms of being able to offer vaccinations and such. Nevertheless there is a price for everything and frankly I think that both [the shares] are horribly expensive.

FIFI PETERS: Agreed. What about the guys who provide the goods we need to live – food? It’s interesting to see the buying patterns there, as food sales, negative in July, moved back into positive territory as the months went by, but ended December at around 1% in terms of an increase. In the food space, which retailer would you choose?

CHRIS GILMOUR: No contest – It’s Shoprite every time. It really showed his worth. I think Pieter Engelbrecht, the current CEO, inherited a real baptism of fire when he took over a few years ago. Whitey Basson left the company in good shape, don’t get me wrong, he left it in great shape. But, as I said, it was a baptism of fire.

There was a whole lot of things with which [Pieter] had to face – flights and this, that and the other. He’s done a phenomenal job pulling himself out of large swaths of Africa, where they’ve been getting a lot of their growth so far. Yet it is intact.

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They are so smart. Shoprite is accessing growth at the high end of the market, taking the Woolies head-on and they are winning. They are also getting growth at the lower end with the current Shoprite chain at the lower end of the market. They leave Pick n Pay in the middle, and frankly they are welcome.

FIFI PETERS: Not to mention the stores they buy from Massmart in this transaction.

Chris, we’ll leave it at that for now. I know there is still a lot to say, but we are out of time. We’ll see you and talk to you maybe in two weeks when you come to the country. It was independent analyst Chris Gilmour.


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