South African consumer stocks have taken a beating this year, and the numbers tell the story of a market repricing risk across the retail sector. Household budgets are under immense pressure, even by South Africa’s demanding standards, and most JSE consumer names have been crushed. A temporary government fuel relief package may soften the blow, but it does not change the underlying economics facing retailers heading into the season that determines their year.
For investors, the timing is uncomfortable. Black Friday and the festive shopping season are the seasonal high for many businesses, and the South African summer holiday is the period on which annual performance often hinges. Miss this one, and the wait stretches until the following summer. With Brent Crude back at highs last seen at the onset of the war in Iran, and fuel costs and look-through inflation feeding through to everyday prices, few market-watchers are brimming with short-term optimism.
The share price divergence across the sector is striking, and it reveals which operators have the balance sheets and margins to survive a promotional, deal-hunting environment. Shoprite and Boxer are up 18% and 10% respectively over the past year, while sector peers Pick n Pay and SPAR have tanked 35% and 56%. The tide has gone out, and it is now clear who has been swimming naked. Growing volumes in this climate requires exceptional operational performance, with the strongest retailers squeezing competitors on price. Put simply, South Africans are looking for deals, and only retailers with strong margins can provide them.
Clicks illustrates how quickly market sentiment can turn. A market darling until fairly recently, the company just posted a further slowdown in growth, and its share price is down 42% over the past year. Arch-rival Dis-Chem is down 17% over the same period. The market is holding its breath to see whether the weakness at Clicks signals a sector-wide problem or reflects stronger trading at Dis-Chem, and the answer will arrive when Dis-Chem releases results at the end of October.
In food and fashion, Woolworths straddles both markets, making direct comparison difficult. New management is putting forward a strategy to lean into categories where they believe they can win, such as food and beauty, rather than categories that represent a blood-red ocean of competition, like apparel. The stock is nonetheless down 26% over 12 months, a performance that sounds revolting until measured against The Foschini Group, down 52%. Rival Truworths is down 18%, though that owes more to a modest starting valuation and a strong UK business than to any excellence in South Africa. Value apparel retailers have offered investors no place to hide either: Pepkor is down 32% over 12 months, while Mr Price is down 22%.
There are relative winners, though they are few and far between. Lewis, with its focus on furniture and a model built around credit, is up 9.5% over 12 months. The modest valuation is doing much of the work here, as the company did not enter this messy year trading on a shiny multiple.
Meanwhile, restaurants present the most confusing picture. Eating out is an easy line to cut when budgets tighten, and the cost of even a basic family meal has soared. Once a week has surely become once a month for many households, and the “night off” takeaway treat may have morphed into a Woolworths Food treat instead. The results at Famous Brands bear this out: like-for-like growth in quick-service restaurants such as Steers slumped from 2.6% in the first quarter to just 0.4% in the second, while casual dining brands with table service, like Mugg & Bean, went from a dip of 0.1% to a 1.0% decline. The Famous Brands share price has nonetheless been more resilient than many consumer names, down 8.9% over 12 months. The real surprise is Spur Corporation, up 14.9% in this crazy environment. The market appears to believe parents will still seek refuge at their local Spur in tough times, with a safe play area and a cold ale proving a winning combination for the iconic chain.
Whether that resilience holds through perhaps the toughest consumer environment in years is the question now hanging over every consumer-facing stock on the JSE.
At the time of writing, the author holds shares in Pepkor, Mr Price and SPAR.