File photo: Simphiwe Mbokazi.

Johannesburg - South African retailers, fund managers' must-haves in their portfolios for more than a year, are fast falling out of favour as debt-led consumer spending starts to unravel.

Borrowing has grown rapidly in the last two years, fuelling retail sales growth of six percent in 2011 and about five percent in 2012, but as consumers have become more indebted lenders have grown more cautious about unsecured lending. With slower credit growth threatening to dampen retail sales, investors in retail shares are cashing in their profits.

The South African retail sector, which has valuations among the most expensive worldwide, has been the worst performer on the Johannesburg Stock Exchange (JSE) in the last month as investors bail out following a slew of sales updates that they said did not justify the high price of the shares.

“It certainly appears from some of the comments and results that the cracks are starting to show,” said Nic Norman-Smith, a portfolio manager at boutique Johannesburg-based investment house Lentus Asset Management.

In 2012 clothing and food retailer Woolworths was the top performer in the sector, gaining more than 80 percent. Its shares have shed 12 percent in the last month, while Shoprite, Africa's top grocer, is the biggest decliner, down about 17 percent but still priced at 30 times 2011 earnings, around double the wider blue-chip JSE Top-40 index.

The median price-to-earnings ratio (PE) of three of South Africa's largest food retailers is about 30 times reported earnings - nearly double a 19 times multiple of 386 retailers tracked worldwide by Thomson Reuters.

“The odds of a favourable investment outcome, paying these kind of multiples, are pretty low, so we will steer clear of the sector,” Norman Smith said.

Shoprite said this month its 2012 first-half sales rose 14 percent, similar to a year ago, but its shares tumbled more than five percent because of its lofty rating. Shares in the grocer had surged 50 percent in 2012, hitting a record 207.76 rand.

Clothes retailer Mr Price, which joined the JSE's blue chip Top 40 index last year after a four-fold jump in market value since late 2009, delivered quarterly sales growth of 10 percent this month compared with 16 percent growth a year earlier.

Its shares had surged more than 60 percent in 2012, lifting its PE ratio to nearly 30 times. That valuation has since dropped to about 22 times.


Consumers helped prop up economic growth in Africa's economic powerhouse last year, with retail and car sales the only two major economic indicators that showed steady growth throughout an otherwise subdued year.

But when retailers' shares were climbing to their peak in the third quarter of 2012, growth in real household income was slowing, according to the central bank, showing that credit, store cards and other loans were underpinning sales growth.

Retailer Truworths, which sells more than three quarters of its clothes on credit, said earlier this month more and more customers were defaulting on their monthly installments.

The Cape Town-based company said first-half sales increased 15 percent but its shares are down more than 18 percent since the start of 2013. Its PE ratio is 20 times reported earnings.

“You can't keep giving out loans to people already indebted. Hence we think growth for retailers would be difficult,” said Patrick Ntshalintshali, a portfolio manager at Vunani Asset Managers.

Credit growth in the third quarter of 2012 slowed to 22 percent compared with 53 percent a year earlier, official data showed, as household debt reached 76 percent of income.

The two main lenders of unsecured debt are Capitec Bank and African Bank Investments, new entrants to a banking market dominated by the 'Big Four' of Standard Bank , Absa, FirstRand and Nedbank .

After several years of fast growth, Capitec and African Bank are now not looking to grow their loan books and are tightening lending criteria.

“We've seen substantial growth over the last 2 to 3 years. The major players, ourselves, African Bank and the four big banks, are becoming more cautious in who they lend to,” Capitec chief executive Riaan Stassen told Reuters.

Capitec is now refusing a quarter of its unsecured loan applications, figuring customers “with existing commitments” cannot afford the extra debt, Stassen said.

The JSE food retailers index is down about 14 percent since the start of 2013 while the bourse's general retailers index has dropped more than 11 percent compared with a gain of three percent for the broader JSE All-share index. - Reuters