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Despite consumer relief after interest rates were left on hold, trading in the discretionary retail sector is expected to remain tough for another six months, according to analysts

August 19, 2008

By Tom Robbins

Cape Town – Despite consumer relief after interest rates were left on hold, trading in the discretionary retail sector is expected to remain tough for another six months, according to analysts.

After hiking rates by 5 percentage points over two years, most recently in June, the Reserve Bank last week left the prime rate unchanged at 15.5 percent, raising hopes that the next move would be down.

But consumers are yet to fully digest the June hike and will likely hold off spending on big-ticket items such as furniture and audio equipment.

Despite the bleak short-term outlook – aggravated by steep energy and food prices – sales of cheaper items such as clothing could lead the recovery, due to higher wage settlements .

Mark Ansley, a portfolio manager at Cadiz, said the bank’s decision to keep rates on hold did not alleviate any consumer pain.

“I do not see consumers taking a view that rates will drop, prompting them to go out and buy a new car or spend more on clothing immediately,” he said.

Ansley expected sales of discretionary goods such as furniture and clothing to remain under pressure for six months to a year.

This would translate into retail company results that “didn’t look pretty”.

But share prices of retailers had already started to recover as investors traditionally took a longer view, said Ansley.

Barbara Price-Hughes, a research analyst at BoE Private Clients, said that while most retailers had avoided negative earnings growth, it was too soon to see earnings growth recovering to beat inflation.

Price-Hughes said: “Consumer confidence has taken a knock and this may see people taking time to improve their personal balance sheets” before spending normalised.

Old Mutual Investment Group South Africa retail analyst Jeanine van Zyl said that as wage settlements caught up with inflation, sales of smaller-ticket items were likely to recover first.

There were already signs of better clothing sales following mid-winter wage settlements of between 10 percent and 12 percent, she said.

It was typical in a cycle that just as inflation started to trend down, the biggest wage increases were awarded.

Clothing retailers include Truworths, Foschini, Woolworths and Mr Price.

But Van Zyl said sales of bigger-ticket items to middle and upper markets would likely remain poor for up to a year, as changes in consumer buying lagged moves in interest rates.

She said higher debt levels in these markets made them more sensitive to interest rates than the bottom end of the market. Consequently, retailers such as the JD Group and Ellerine could be among the last to recover sales growth.

Price-Hughes added that Christmas spending could again be “fairly subdued” and travel could be among the hardest hit sectors.