Apparel Retail Gets Tough In South Africa

Apparel, Footwear, Fashion

Apparel Retail Gets Tough In South Africa

When Mr Price posted its full-year results last week, its share price rose nearly 4% - and spiked to an even higher level in the course of the day. This was in spite of it posting a 12% drop in earnings.

The earnings decrease, its first in 16 years, marks a dismal milestone for the company, which has for years been the darling of apparel retailers. The market appears to hold the view that Mr Price is in a turnaround phase and is focused on regaining market share from competitors. It's not quite clear what this involves other than sourcing better products to appeal to more shoppers, but the increase in share price suggests buy-in.

The retailer has been fighting in a maelstrom of frenzied price discounts, as its traditional competitors have promoted these more heavily than before in a tough landscape. Consumers are under pressure, and international chains such as H&M, Cotton On & Zara continue to reshape the landscape, offering fast fashion.

Mr Price, which also sells homeware and furniture, maintained its full-year dividend, which has not declined in the past 31 years, at 667c/share. The final dividend was 438.8c/share, up 4.7% on the previous comparable period. Total revenue increased 0.7% to R19.8bn, with retail sales decreasing 0.5% to R18.6bn and comparable stores down 3.6%.

The apparel sales since the year end - combined with the identification of issues of the past year related to inventory, such as seasonal shifts and getting the fashion wrong - have given the market some confidence that there is a turnaround. Ashburton Investments fund manager Wayne McCurrie says, "The true problem was that Mr Price got its fashion wrong in Mr Price Apparel. People didn't like what it had on its shelves. It had lots of sales, but people didn't want to buy what it had. That’s not unusual - it does happen."

Sales volumes were heavily negative at Mr Price Apparel, including at Miladys. Overall, sales volumes were down about 10% in volume terms. However, "that unloved fashion is now out of the system. The new lot looks quite good," says McCurrie. Mr Price has changed its procurement policy. Competitors are doing less discounting and, says McCurrie, "it looks as if Mr Price is achieving a turnaround from the very poor year it had last year. It's still early days, but the market has certainly liked what it's seen."

Mr Price has positioned itself to be differentiated, as it offers a wide range and low price. Competitors tend to offer either a small range, or a big range at higher price. "It felt a lot of its competitors moved into its niche," says McCurrie. This wasn't helped by very weak economic growth last year.

John Pierre Verster, portfolio manager at Fairtree Capital says the marked price difference between Mr Price and its competitors has shrunk to a point where it's small enough for customers to go elsewhere. Not everyone buys into the idea of a turnaround. Senior equity analyst at Sasfin Securities Alec Abraham says, "The performance was bad. They say the turnover of Mr Price and Miladys is up a combined 10% this year, but one swallow does not a summer make."

Abraham says the problem extends beyond Mr Price to all local apparel retailers. "They need to reinvent themselves.. In the old days it was very cushy. Now there are other players, and the SA retailers need to find their place in the new structure."

Mr Price says any improvement in the consumer environment is likely to be gradual. "The year proved to be exceptionally challenging for the retail sector. Consumer confidence remained low as a result of the poor state of the local economy and a lack of faith in the current political leadership's ability to set high standards of governance and deliver inclusive growth."

Finance group HSBC expects virtually no growth in apparel sector profits until 2019. According to Bloomberg, HSBC analysts Jeanine Womersley and Harshul Sharma said in a note that SA consumers are "unlikely to see a cyclical recovery in 2017, and even if this does materialise, it's unlikely to be of the magnitude required to offset the structural headwinds we believe face the sector".