FOR most of last year, South African retailers continued to surprise — delivering solid results in a difficult trading environment. But a slew of lukewarm festive season updates from some major players signalled that the looming threat of a consumer spending slowdown had finally arrived.

"I think the subdued optimism and the lack of spectacular growth is something that most analysts started saying more and more as we got closer to the festive season", Ernst & Young retail and consumer products sector leader Derek Engelbrecht says.

"Some retailers have performed better than others, but generally speaking — considering the expectation, everybody didn’t do as well as they had hoped to do."

While most retailers were cautious in their expectations for the Christmas trading period, results were disappointing, sending share prices plummeting.

Retail stocks have had a stellar run over the past two years as the seemingly insatiable appetite of foreign investors in search of higher yield continued to drive valuation — boosted by the hype over the rest of Africa’s growth prospects. However, local market players have voiced concern that the price: earnings ratios of retail companies have been unsustainably high, with retail counters not pricing in the risk of a slowdown in consumer spending.

This month, shares in Shoprite Holdings had their biggest one-day drop in more than six years, plunging almost 6% after Africa’s biggest grocer posted a 13.8% increase in turnover to R46.7bn for the six months ending December.

The market was expecting an increase of about 15%.

Massmart, owned by US giant Walmart, posted a 14.6% gain in sales for the 26 weeks to December 23 to R36.1bn, which failed to impress. "The expectations were very high, so far the updates have been below those lofty expectations. The valuation levels have implied these high expectations of profit growth and the drop in share prices on the back of the updates show how high the expectations were," 36ONE Asset Management analyst Jean Pierre Verster says.

He says a complete assessment can only be made after other players such as "the furniture retailers and Pick n Pay" provided trading updates.

"It seems like there has been a deceleration in top-line growth overall but they are still growing at rates above inflation, which is not bad; there is still real growth out there," Mr Verster says.

Calling Clicks Group’s numbers for the 18 weeks to December 30 "reasonable," Absa Investments analyst Chris Gilmour says Woolworths’ trading update was "without a shadow of doubt the best we’ve seen so far."

According to Mr Verster, consumer spending and the pressure on consumers is not the same across all Living Standards Measure (LSM) groups.

"In the lower LSM groups it seems like there’s a lot of indebtedness that isn’t even recorded because of the more informal lending markets. In the middle LSM groups people are getting squeezed between higher electricity, food and other increases which aren’t being relieved by increases in wages. And at the top end consumers are benefiting from more exposure to risk assets like shares and bonuses — that’s why the Woolies update was quite decent."

The darling of South African clothing retail, Mr Price, came in below the 16% the market was expecting, reporting sales growth of just 10% for the third quarter.

Meanwhile, Independent Securities CEO Simon Fillmore says that while Foschini Group’s update was "a little bit light", unlike the "decent" Truworths update, the market was not surprised, given the other retailers’ updates.

Fast-food operators seem to have fared better.

Famous Brands recorded the highest-ever turnovers by several of its biggest brands, including Steers and Debonairs Pizza.

Rival Spur Corporation continued to aggressively push its promotional strategies, such as its Monday Night Burger and Unreal Breakfast specials, and report double-digit growth in the six months to end-December.

Looking ahead, conditions are not expected to be rosy for retailers. The underlying trend in retail sales will probably remain soft into this year due to fragile consumer confidence, the Nedbank Economic Unit says.

"The low-interest-rate environment, above-inflation income growth and unsecured borrowing should support consumer spending. However, consumers are also likely to be more cautious about spending, particularly on nonessential items due to the poor economic outlook," the unit says.

The Nedbank Economic Unit says the threat of job cuts by some companies will heighten worries about job security, while high inflation will erode some of the benefit of the higher wage settlements.