U.S. Markets open in 7 hrs 48 mins

Ailing South Africa Consumer Back in Focus as Mr Price Drops

Adelaide Changole

(Bloomberg) -- The weak state of the South African consumer was back on investors’ minds Thursday when Mr Price Group Ltd. said shoppers “continue to be constrained” as the retailer presented a four-month trading update.

Mr Price fell as much as 14% to the lowest in more than two years in Johannesburg, dragging peers down with it. Truworths International Ltd. slipped 3.2% and Woolworths Holdings Ltd. 2.9% as an index of general retailers dropped the most in seven months.

Economic expansion, unemployment, inflation and disposable income remain at levels that aren’t supportive of growth, the retailer said. The clothing business provided the greatest headwinds, with the company failing to get its product mix right, causing “an imbalance in the shape of the assortment” and deeper-than-desired markdowns that hit margins.

“The Mr Price update commentary concurred with that of other retailers highlighting the pressures the consumer is under,” said Michele Santangelo, a money manager at Independent Securities. “The comments from management don’t spur much confidence for investors, with a list of factors putting a lid on retail growth prospects.”

South Africa’s economy contracted the most in a decade in the first quarter and the jobless rate climbed to 29%. Business groups and analysts have warned that the country could be pressed to ask the International Monetary Fund because of ballooning debt.

“Our negative views on the economy and consumer-facing sectors are becoming a reality time and time again and we remain bearish,” said Casparus Treurnicht, a money manager at Gryphon Asset Management. “Some portfolio managers might comment that there is value in retail and banks. We do not agree.”

Even so, there may be some hopeful indications: Mr Price said “early signs of a performance recovery into spring and summer have started to emerge,” with sales accelerating after the four months covered by its update. And South African retail sales rose for a sixth straight month in June, suggesting there is still life in the country’s consumers.

“The results from many retailers are not completely disastrous, but the rich valuations of many of the South African retailers, which remain in the upper teens on a price/earnings basis, means that the subdued growth outlook and constrained spending environment could lead to further company deratings,” Santangelo said.

Mr Price was 13% lower as of 4:47 p.m. in Johannesburg, its biggest decline since January. An index of food and drug retailers slumped 2.1%, with Spar Group Ltd. leading the slide, down 5.5%, the most in 18 months.

(Updates share prices.)

To contact the reporter on this story: Adelaide Changole in Nairobi at achangole2@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen, Tom Lavell

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.