Syd Vianello: Waving the big red flag on retail stocks

Independent analyst Syd Vianello hasn’t got many comforting words for retail sector shareholders, and warns that something’s gotta give á la Ellerines, if excessive growth in space accompanied by marginal, or even negative growth in total volumes or total sales continues. He comments on the fact that results from retailers such as Woolworths and Pick ‘n Pay were perhaps adequate on the surface. If you dig a little bit deeper however, and include inflation rates that aren’t necessarily highlighted within results, like-for-like, you’d see that there were drops all over the place.  – CH

ALEC HOGG:  Welcome back to Power Lunch.  South African retail sales rose two-point-six percent, year-on-year, in November, it’s the most recent numbers we’ve got, and a number have since released trading updates.  Independent analyst, Syd Vianello is with us in the studio to talk about these.  We’ll be picking up in a moment on Woolworths in particular, but Pick ‘n Pay.  Pickwick’s share price down five percent today and Pick ‘n Pay’s share price is down two-and-a-half percent.  Overseas Tesco, and I’ll tell you where I’m heading with this one, is now junk status.  It has just been falling off the table.  The man who’s in position to return Pick ‘n Pay to its former glory is the former Tesco employee, Richard Brasher, so we are outsiders, you’re an insider, is Brasher perhaps worth backing on Pick ‘n Pay?

SYD VIANELLO:  Alec, I think, I really think it’s a little bit unfair to kind of, put the Tesco thing on Richard Brasher’s head and say ‘well, you know is he the right man for Pick ‘n Pay’.  Tesco’s problems, you can’t blame Brasher.  We’ve got to blame the man or men who were above him.  I mean, if you go back to Tesco’s history, the problems and I’m sure, there are issues in the United Kingdom business but there are other issues, with regards to their international expansion.  The vast majority of which turns out to have been, with a little bit of an exception, may be in Eastern Europe, but I mean the vast majority turns out to have been a bit of a disaster.  Brasher had nothing to do with that.

ALEC HOGG:  Yes, but it might be a good thing because if he was fighting with the guys above him saying ‘ you have to fix things’.  Of course, he did leave under a bit of a cloud.  Maybe he would have…maybe Tesco would have been different had he stayed there, so I’m not saying…I’m not drawing any conclusions.  I’m saying well, perhaps it’s a good thing that he left when he did.

SYD VIANELLO:  I’ll tell you what, what Richard most certainly would have learnt from the Tesco experience, and what’s happened now and I think it does have a certain amount of relevance in the South African context.  If you are growing trading space for a long period of time, way above the rate of growth, and you’ve just given a two-point-three percent figure way beyond the rate of growth in actual sales in the industry or in any particular category.  Well then, like-for-like has got to go down.  That’s what’s happened in England and Tesco, in a way, I think was simply kind of following the herd instinct, because Sainsbury or ASDA, which is part of Walmart or Morrison’s, for growing space at X percent.  We can’t afford to be left behind, so we kind of got to do the same thing, and that herd instinct, to an extent, is applied in this country as well.  One thing I think that Richard would be certainly well aware of, is what happens is if this sort of thing continues ad infinitum?

ALEC HOGG:  And when the music stops?

SYD VIANELLO:  Well that’s it.  Something has got to crack.  Look what’s happened in furniture, and I don’t know how much we have but I can talk about the furniture thing for hours.  I mean, Ellerines, the weakest link had to crack eventually, and that was Ellerines, and part of it is…  I mean just excessive growth in space, versus pretty benign and, in some cases, negative growth in total volumes or in total sales.

ALEC HOGG:  You must be waving a big, red flag then Syd.

SYD VIANELLO:  Well, it’s a long-term problem, and just have a look at the sum of the numbers that have come out in the past 48 hours.  Look at what we’re seeing.  Take Woolworths, for example.  The numbers overall, the total number was not that bad.  Not great, not bad, but kind of plodding along quite nicely, but have a look…let’s just dig into the clothing side.  Like-for-like clothing growth, I think was three-point-four, or let’s call it three-and-a-half percent, incidentally they didn’t’ give you the inflation number, in clothing.  Now, trust me; it was probably six, seven, or eight percent, which means that unit sales in existing stores fell, and they fell quite sharply.  Maybe that’s the reason why they didn’t give you the inflation number because they don’t want us to see that kind of figure.  Even in food.  If you take like-for-like sales, so you take inflation, unit sales fell.

Now, in food they’ve done pretty well, so with inflation the like-for-like inflated.  It was okay to cover costs, but if you take a situation, if you take the clothing, and you take some of the other numbers that have come out, take Truworths for example, which was really poor.  You can’t tolerate that forever.  Eventually, it is going to start hitting your profitability, and eventually you’re going to have stores, particularly with rent renewals, which come up every five years, when they do a rent renegotiation, you’re going to find guys forced to close stores because they’re just fundamentally unprofitable.  That is something that, fortunately, ‘The Richard Brasher’ has now been through at Tesco, and may be, and I’m just kind of being the devil’s advocate, maybe Pick ‘n Pay’s growth strategy, which is nothing like Shoprite’s.  Maybe his growth strategy of being more careful in rolling out space could turn out to be the right strategy, at the end of the day.

ALEC HOGG:  Well, he’s certainly got the opportunity because, as you say, he has the experience.

SYD VIANELLO:  Yes.

GUGULETHU MFUPHI:  Exactly.  How will that work, especially within correlation with the African story?  I think Spar; they expanded into Ireland instead of the rest of the Continent.  Shoprite is the leader here.

ALEC HOGG:  If you go and look in Ireland, you’ll see those Spar stores there.  They are not a patch on South Africa’s, so once they upgrade those stores – yes.

GUGULETHU MFUPHI:  Exactly.

SYD VIANELLO:  Yes, well look, but there’s a lot of work of course, that’s got to be done because somebody has got to upgrade something for nothing.

ALEC HOGG:  Not?

SYD VIANELLO:  They don’t come at no price.  There’s a lot of work that’s got to be done and obviously, we’re not talking about spending Rand.  We’re talking about spending Euros, so, yes, it’s a great opportunity but it is far away from home and there may be culture issues that have got to be dealt with.  Fortunately, they haven’t kind of, transported South African management.  The management there have a stake in the business as well and it is in their interest to make it work.  That’s the biggest risk, of course, with foreign expansion.

GUGULETHU MFUPHI:  Yes.

ALEC HOGG:  So, quickly, looking at the retail sector, are there any stocks that you believe do offer value?

SYD VIANELLO:  I don’t really think so, and I was talking to some other people yesterday.  The purpose of the discussion was to talk about the results and there was somebody else with me, and they started talking about evaluation, and what I said, very clearly was ‘there are two issues here.  We can talk about the results of the individual retailers, and then we talk about valuations as another issue’.  When I say that Woolworths came out with fair results.  I mean, there are a few issues here and there, but when it comes to an evaluation, when you look at the dilution that’s going to come from all those shares that were issued for David Jones, and you look at the timeframe it’s going to take to fix it up.  We’re not going to debate…  We’re not even going to debate whether the fixing up is going to work or not, and how long it’s going to take to work, but there are issues, with regards to valuations.

Whether it’s Woolworths, whether it’s Massmart, even whether it’s Shoprite, for that matter, that’s another debate completely.

ALEC HOGG:  A big red flag that Syd Vianello is waving for us, who is an independent analyst.

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