RAND weakness is making investors fall out of love with the fashion and home-ware retailer Mr Price.
This bout, and forecasts of further possible downward movements in the currency, make one wonder just how retailers will manage the higher cost of their imports, especially as the South African consumer isn’t in such a great space.
Last Thursday, the Durban-based company released a trading statement telling shareholders the good news that for the 26 weeks to end-September, earnings would be 20% higher.
Given the disappointing numbers from companies in other sectors of the economy, not to mention some of the retailer’s rivals, 20% and above earnings growth is something that markets would usually be happy with. But instead, the company’s stock ended the day more than 1% lower.
Yesterday, the cash-based retailer was more than 9% weaker, trading at levels last seen at the beginning of July. Since the trading statement, the counter that could do no wrong has dropped more than 13%.
In its 2012 annual results, Mr Price said cash sales made up 81.4% of the total.
So what has changed, given that the group has delivered growth that most of its rivals would be thrilled with? The rand has weakened and weakened significantly at that.
And with expectations pointing to a long run of weakness of the currency, the cost of importing clothing from China and other foreign sources is set to rise. I’m not to sure the cost increases can simply be passed on to consumers.
Mr Price obtains merchandise from China, Pakistan, Vietnam and India as well as South African manufacturers and suppliers who, in turn, may obtain goods offshore, according to its annual report.
Mr Price’s retail sales for the year to end-March rose just over 10% versus an 8,9% rise in cost of merchandise and services. Over this period, the rand traded at an average of R7,45/$1.
So far in its current financial year that ends in March 2013, the rand is trading at an average is R8,21/$1, 10,2% weaker than the previous year’s average. While Mr Price has come into focus because of its trading statement last week, its rivals have come under pressure too. Truworths has lost 6,7% in value and Foschini more than 9% over the past two days. Woolworths has seen its stock fall just under 10% over the past three days.
If we are set on a path of prolonged weakness in the local currency, costs are going to become a much bigger problem for retailers that obtain their goods offshore.
Passing on those higher costs to South African consumers who are already under pressure will not be easy, without giving up some market share.
THE rand’s bout of weakness may pose some significant challenges for SA, especially if the weakness continues for the rest of the year and into next.
London-based Capital Economics sees the currency continuing on its downward trend into the first quarter of next year.
Here’s my big fear.
As a large chunk of SA’s mining sector is not operating because of labour disputes, the current account deficit is getting worse. As the gap between imports and exports grows the rand will remain under pressure.
Ratings agencies have been wary of this deficit since November last year.
The longer it takes labour, business and government to get mineworkers back at their stations, the more anxious ratings agencies — apart from Moody’s — get about SA and its current account deficit.
With some expecting these ructions to continue well into the fourth quarter, the ratings agency may have to pull the trigger and downgrade the country, increasing the cost of servicing debt.
That’s bad enough, but consider that the Treasury will be servicing higher debt with a weakening currency and it becomes a much more depressing really.
Under such strain and in a global economy that looks to report sluggish growth over the next couple of years, where will the government find the room to spend to support the domestic economy?
Higher debt costs and a deteriorating currency choke the ability of the state to play its role in boosting the economy. Construction stocks such as Murray & Roberts and Aveng can expect an even longer winter.
The closer scrutiny that developments in the troubled mining space have brought upon SA weakens the government's ability to support the economy.
This time there’s no China to help bail us out.
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