SOUTH AFRICA – The JSE’s retail shares slumped on Wednesday, led by Massmart, which warned first-half earnings were expected to plummet as much as 29%, affirming the erosion of disposable income as consumers remain challenged by rising debt, increased living expenses and heightened unemployment.
Massmart fell 8.61% to R134, Pick n Pay Stores dropped 5.23% to R54, and Shoprite continued Tuesday’s slide by losing a further 2.41% to R142.
Massmart’s trading warning was the retail sector’s second blow following Shoprite’s full-year earnings miss on Tuesday.
Negative sentiment emanating from other retail counters not being able to sustain earnings at current valuations dragged other players lower. The JSE’s food retail index fell 2.2% and its general retailers index 1.38%.
“The South African consumer is in a fairly poor state — we’ve had all the strikes, there’s been virtually no job creation … the economy is doing quite badly, debt levels are high, and interest rates are going up. Though not a disaster, the overall consumer environment is relatively poor,” Momentum portfolio manager Wayne McCurrie said.
Wal-Mart-owned Massmart said headline earnings per share were R1.59-R1.78 in the 26 weeks to June 29, compared with R2.25 the previous year. The group, whose chains include Game and Builders Warehouse, will report results next Thursday.
Local retail shares became the flavour du jour for offshore investors, who increased their holdings significantly on the hype over Africa’s growth prospects.
“(Retail shares) are expensive. The JSE’s average valuation over time, is probably a 14 price:earnings ratio and it’s currently at 18, so the JSE looks a bit expensive relative to its average. Shoprite was at a 22 price:earnings!” Mr McCurrie said.
“We know the consumer environment is bad. First Shoprite’s results and then confirmed today by Massmart … they’re simply not making enough profit to justify their share prices and that’s why we’re seeing the weakness.”
Much of the stellar retail growth in the past was fuelled by easy credit and financed with unsecured lending, both of which have been curbed dramatically. The price:earnings ratios of retail companies have been unsustainably high, with retail counters not pricing in the risk of such a marked spending slowdown.
Basic earnings per share at Shoprite rose 3.3% to R6.98 in the 12 months to June, below the R7.35 mean estimate of 15 analysts in a Bloomberg survey. Turnover for the period was up 10.5% to more than R102bn.
With a high multiple the market expects big things from the company, said Vestact portfolio manager Michael Treherne. “The stock is a great ‘rest of Africa’ play with exposure up throughout Africa, including countries like Nigeria which only have 5% retail penetration,” he added.
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