Cape Times

Navigating valuations and growth potential in apparel retail sector

- Ann Sebastian, co-portfolio manager of the PPS Defensive Fund.

DESPITE the re-rating in apparel retail shares following the formation of the Government of National Unity (GNU), valuations remain undemandin­g, with most apparel retailers trading below their historical average price-to-earnings multiples. Continued outperform­ance will likely require earnings upgrades, which have proven fairly elusive in the sector to date.

Prospects for faster gross domestic product growth, lower inflation, interest rate cuts and the potential benefits to consumptio­n from the two-pot pension system should, however, support retail sales and earnings growth over coming quarters.

Truworths’ latest trading statement highlights the challengin­g trading environmen­t in the near term. Weak South African operating performanc­e is expected for financial year 2024, but likely marks a cyclical turning point.

Management is encouraged by early indicators, and they see the macro environmen­t easing most significan­tly for South African consumers in calendar year 2025, off a low calendar year 2024 base. Credit demand and affordabil­ity should improve due to monetary policy easing. Furthermor­e, prospects for higher growth and lower inflation should boost consumer disposable income and spending in the medium term.

Mr Price offers prospects of continued gross margin improvemen­t broadly, with margins in the Home division evidently troughing. Competitiv­e pressures are normalisin­g to some extent, leading management to feel confident about recovery. Growth in space and recent acquisitio­ns should drive Mr Price's sales in the medium term.

Given the heightened competitio­n in the South African apparel and homeware sector, these are key opportunit­ies for market share gains. Due to its significan­t exposure to value fashion, it directly competes with foreign online retailers such as Temu.

A recent regulatory change, however, might level the playing field for all imported clothing items, and may slow the global online threat. Shipping delays remain an issue, but the company is prepared to manage the risks ahead of the festive trading season.

In Foschini’s latest trading statement, the management notes that trading conditions have improved post the South African election. While the headline reads disappoint­ingly at first glance, with lower sales across all operating platforms, investors may be encouraged by the gross margin recovery.

The company's focus is margin expansion and cost control. This includes the benefits of its newly-acquired distributi­on centres, e-commerce, manufactur­ing and accelerati­ng growth for the newly-acquired Jet and Tapestry brands.

Cash generation improved markedly in financial year 2024, and the balance sheet is in decent shape.

Woolworths published a weakerthan-expected trading update. While the food business performed well, the apparel business continues to struggle. Country Road's weakness in Australia persists, although the brand delivered positive growth, while other brands (Witchery, Politix) were weak and the group impaired Politix's goodwill.

In spite of Woolworths' early success with its “edit to amplify” strategy, the division is now struggling.

Face Beauty and Health business may be facing structural and cyclical issues with pricing concerns as consumers trade down.

 ?? ANN SEBASTIAN ??
ANN SEBASTIAN

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