This year holds good fortune for fashion retailers such as Mr Price and Foschini, meanwhile the country’s largest retailer Edcon might have to make a painstaking decision about its future, equity analysts said last week.
Mr Price will continue to be the darling of the market this year, with Foschini following close-by.
Foschini’s decision to sell its financial services book RCS to the French personal loan firm BNP Paribas has put the retailer on a higher pedestal.
Indebted consumers
South African fashion retailers, especially those which are credit-dependent, had it tough last year as highly indebted consumers struggled to pay off their clothing accounts.
Retailers and banks also took it upon themselves to introduce much stricter criteria for consumers applying for store accounts which led to a decline in the store accounts’ approval rate.
Wayne McCurrie, the senior portfolio manager at Momentum Asset Management, said this trend would continue into this year.
“It is not that the people do not want to borrow more, but the retailers have become more cautious in giving out credit.”
Ron Klipin, the portfolio manager at Cratos Wealth, said Foschini was likely to become a market favourite this year as it had managed to sell its RCS book to BNP Paribas Personal Finance.
“They are therefore not impacted by a growth in bad debts and can focus on running their business quite effectively.”
Foschini’s recent acquisition of the UK-based company Phase Eight showed that the company was now going the geographical diversification route and looking for growth offshore.
“From a local perspective there should be more disposable income arising from the falling petrol price, and consumers will be able to spend more on clothing,” Klipin said.
In terms of cash-sales attractiveness, Mr Price leads the pack but it also appears to be fully priced in the short term.
However, Foschini had now become a good bet and was still attractively priced, Klipin added.
Short turnaround
He said Woolworths should not be left out as it had a good merchandise selection and a short turnaround time for new merchandise offerings.
“The diversity of brands including Witchery, Country Road, and Trenery enables Woolworths to encompass a broad spectrum of LSMs (Living Standards Measure), which is an attractive feature.”
Speaking of Edcon, Klipin said if one looked at Edcon’s Ebitda (earnings before interest, tax, depreciation and amortisation) numbers, Edcon was still profitable.
However, it was weighed down by a massive debt overhang, which remains a major challenge.
“On top of that they are losing market share to Woolworths and Foschini and other retailers.”
McCurrie said Edcon was bought by a private company, Bain Capital at a wrong time, which was not dissimilar to African Bank buying Ellerines at the wrong time.
“Edcon is heavily geared and very short of positive cash flow to service their debt,” McCurrie said.
He believed that it was inevitable that some of Edcon’s debt would be converted into equity.
“I do not think they can continue with these very high levels of debt.
“Some of the debt suppliers will have to convert the debt into equity so that they can drop their interest rate which will strengthen their balance sheet. I also think there needs to be some restructuring which might include selling something or closing some of its unprofitable stores. They cannot carry on like this,” McCurrie added.
Meanwhile, Truworths was taking some flak from the indebtedness of consumers, Klipin said.