Which companies will wear it better?

Clothing retailers stand to lose roughly 10{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of their annual turnover due to the government-imposed economic lockdown. They would need to cut costs especially rentals – markedly, in order to lessen the blow to their profits.

“The lockdown fell over the Easter period, which is generally one of the higher sales periods during the year,” Rella Suskin, head of research at Benguela Fund Managers, tells finweek. “We believe that Covid-19 will have a longer- lasting impact, beyond the lockdown period.”

With share prices already under strain, the initial loss of five weeks’ worth of trading is compounding the listed apparel sector’s fortunes. Pre-lockdown escalating unemployment, an economic recession and high real interest rates all bore down on these companies’ customers.

“Five weeks of lockdown will have a dramatic impact on clothing retailers’ earnings, as these companies will be sitting with a large amount of inventory that they will not be able to move,” Adrian Saville, chief executive of Cannon Asset Managers, tells finweek.

“So when ‘normal trading’ resumes, each of these companies will be faced with the same dilemma – moving this stock as quickly as possible.” But there’s a catch.The lines that the retailers had when lockdown began in March will not be relevant to May, given the onset of winter, says Saville.

Thus, expect large sales promotions in early winter in order to move stock from warehouses through tills. In addition, to curtail their expected losses for the current fiscal year, the apparel retailers would need to pull out all the available and remaining stops.

They would need to look at streamlining costs to manage the depressed sales outlook that analysts are expecting, says Suskin. “Those that are able to produce more inventory locally will be better off as the rand weakens,” she says. “Efficiencies in supply chain, operating costs and employee costs will need to be prioritised. Certainly, growth prospects – new store openings – will be halted.”

Another attempt to curtail expenses includes renegotiating leases – a large chunk of the cost to operate.The large apparel retailers will hold substantial bargaining power in these negotiations as landlords certainly cannot afford to lose them, according to Suskin.

“SA has one of the highest concentration of malls globally, and the days of international retailers wanting their share of space has passed, for now at least. The landlords rely on the listed retailers for survival.”

The likelihood of apparel retailers negotiating for payment holidays, a reduction in actual rental amounts, or the reduction of future rental increases is high and might be critical to the survival of some retailers, explains Saville.

“In fact, the Retailer group, representing South Africa’s five biggest clothing retailers, has already begun negotiating with landlords for an 80{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} reduction in rent for April,” he says. “And under the circumstances, there can be little doubt that retailers and landlords will have to find each other, and then reach new agreements to deal with events beyond the current crisis.”

So, which apparel retailers stand to be worst affected by the coronavirus lockdown and which will be least affected? Mr Price, Truworths and TFG will be among the most impacted in terms of contribution of clothing and accessories to total revenue, although Mr Price’s margins offer it more resilience, says Saville.

“In my view, Mr Price will be able to weather the storm best,” says Suskin. “The company has a strong balance sheet – no debt – and they have a proven track record of above-average operating cost management.” The company’s net cash position also allows them to raise debt for additional liquidity if need be, she explains. “Peers do not have this optionality to the same extent,” Suskin says.

This is also reflected in the share prices of the apparel retailers. Mr Price has surged 18{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} – the most among its peers – over the last 30 days. It’s down 29{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} – the least among them – since the start of the year.

Woolworths stands to be saved by its food division. “While Woolworths’ clothing retail section will have shut down almost entirely during the lockdown, the group will be substantially sheltered by its food division, which accounts for some 45{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of its revenue, as well as its Australian operations,” Saville says.

Woolworths’ share price is the second-best performer after Mr Price and rose 7{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} over the past month, although its year-to-date decline is 39{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}.“On the other hand, TFG has been struggling to manage their operating cost base over the years,” says Suskin. “Their focus has rather been on gaining market share by discounting. This, however, has not translated into an improved bottom line.”

Add to that a likely jump in Truworths and TFG’s credit books due to customers not being able to pay their retail accounts amid job losses and foregone salaries. “TFG’s cash flows will be under pressure,” she says.

This sentiment is echoed in the two stocks’ price. TFG is up 2{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} over the past month and down 48{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} since the beginning of the year. Truworths rose more than 6{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} over the past 30 days and is 36{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} lower than the beginning of the year.Another view, according to Saville, is that TFG and Truworths’ offshore operations, which account for 30{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of their total revenue, may come to their rescue. 

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