Struggling retailers victims of own easy credit – analysts

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Johannesburg - The “free for all” credit-granting phase driven by retailers was slowly coming back to haunt them, analysts said last week, adding that a recent decline in credit sales was a concern and was likely to go on for the next 12 months.

Retail analysts were reacting after two of South Africa’s biggest credit dependent retailers, Truworths and Edcon, saw a decline in credit sales, which is putting pressure on margins.

Truworths turned down 74 percent of applications for new accounts during the six months to December last year. However, credit sales still made up a significant 71 percent of sales, a small decline from 72 percent a year earlier.

Truworths chief executive Michael Mark said people were very extended on credit and at the same time the unsecured credit lenders, banks and other store credit card firms had been offering far less credit.

“There is currently a large credit contraction going on in the country.”

Mark said in the short term, this meant that Truworths was under pressure and exposed. However, in the medium term, he believed that this was just a cycle out of which retailers would emerge strong.

“This means that everyone will be more sensible about credit granting next time around. We would have learnt from all of our mistakes and be perhaps more cautious in the future. But we will come out more positively,” Mark said.

Edcon, which owns one of the biggest credit-reliant fashion stores, Edgars, experienced an 6.8 percent decline in credit sales and a 14.2 percent jump in cash sales.

The group’s chief executive, Jurgen Schreiber, said that although he was happy with growth in cash sales, the slowdown in credit sales concerned him.

Evan Walker, a portfolio manager at 36One Asset Management, said Truworths had had a huge take-on of new customers over the past four years, but that customer-growth trend had slowed dramatically.

“With the level of debt that has come through we think that the customer-growth number will possibly go negative, meaning Truworths might write off more customers than they will acquire in the next 12 to 18 months.”

Walker believed that Edgars stores had already experienced this dynamic and had already seen a dramatic slowdown in new customers. He said: “Keeping in mind that Edcon sold its books to Absa puts it in a far worse position than its competitor Truworths.Truworths can manage its own book and can advance on that book if it wants to.”

He felt this high indebtedness period could play out in the next 18 to 24 months of quite dramatic credit consolidation, but Walker said the stricter credit access was in fact good for consumers.

“Consumers are in so much trouble because of easy access to unsecured lending from banks, retailers and other credit providers, and it is expensive credit too,” he said.

However, Walker believed that despite all the regulatory systems in place, people were still accessing credit.

He believed the National Credit Act that was put in place in 2007 did not help to slow down excess credit access.

“The retailers and the banks are to blame. It has been a free for all and it is going to haunt them,” Walker added.

Abri du Plessis, the chief investment officer at Gryphon Asset Management, said: “The slow growth on retail sales suggests that the cycle which is usually triggered by interest rate hikes has already started.”

Du Plessis said this trend was set off by unsecured lending going overboard. “It had become too easy for consumers to access credit and we all knew it would not go on forever.”

However, he said it was good that banks and other credit providers were becoming more strict in offering credit. - Business Report


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