Should You Be Shopping For Retail Shares?

With consumers remaining under sustained pressure, retailers continue to struggle – in most cases relying on festive periods to boost numbers. Are there any investment opportunities in this sector at the moment? Analysts explain why investors should continue to approach with caution.

Don’t let the hordes at the tills on Black Friday, or the busy malls in the run-up to Christmas fool you. These are just a few highlights in what has otherwise been a bleak time for clothing retailers.

In fact, many are pinning their hopes on these special events, sales and constant markdowns just to keep going, most notably Edcon – the former darling of the sector – which is now struggling to stay afloat.

The sales and earnings pressure on the major retailers and their fight for market share in an increasingly competitive and crowded market are evident. Their share prices, although under pressure, remain demanding on the whole and not necessarily a good investment right now, according to analysts.

The problem for investors is that the companies that are doing well, like Mr Price, are trading on pretty demanding price-to-earnings ratios (P/E) – in the case of Mr Price a P/E of 22. Analysts also remain wary about the fortunes of the rest over the next few years, indicating that their relatively lower P/Es should not necessarily be seen as a reason to buy, nor are they necessarily cheap.

Latest figures from Stats SA show retail sales of textiles, clothing, footwear and leather goods were up 2.8% in September, which pretty much sums up the sector’s lacklustre sales trend over 2018 and sales prospects for 2019 – certainly until the election.

Producing earnings to justify a buy call on that kind of sales growth and expectations of earnings pressure is a tough ask. The results of the major clothing retailers show just how difficult it has been.

Investment outlook

South African clothing retailers are well-run and have done well under trying conditions to get their pricing right and manage supply chains and gross margins, says Evan Walker, 36ONE Asset Management portfolio manager.