The Finance Ghost: Clicks vs Truworths — mind the (expectation) gap

After a tough 2025 for local retailers that included some truly awful share price performances (particularly in clothing retail), one of the major current discussion points for local investors is whether 2026 will see a recovery in the sector. Successfully identifying a recovery story can be a highly profitable strategy, as catching broken stocks on the rebound often leads to market-beating returns. Of course, if it were that easy to identify the bottom, then everyone would be rich.

In the real world, it’s extremely difficult to find the “right answer” about the timing of a rebound, particularly when the decision inputs range from company-specific financial information to market sentiment and geopolitical factors. This is exactly why stock pickers use a variety of tools that include fundamental analysis (the financial performance of the company itself) and technical analysis (chart patterns).

Above all else, the important thing to remember is that market responses will be driven by the gap between expectations and reality. When a company does better than expected (even if the numbers are objectively poor), the share price will react positively. When a company misses expectations, even if the results are still decent, the share price will react negatively.

This is why it’s possible to lose money on a great company and make money on a weak company. It’s also why in the past week, beleaguered Truworths significantly outperformed market darling Clicks.

Clicks at 52-week lows

Clicks is an excellent retailer. The business model is based on using pharmacies to attract people to the stores, with the so-called “front shop” stocked with high-margin categories such as health and beauty, and small appliances. To complement this growth story (and because pharmaceutical giants can’t always get pharmacy licences wherever they want them), there’s a wholesale business that supplies independent pharmacies in addition to Clicks’ own pharmacies.

Despite this, the stock is trading very close to its 52-week low. When you consider the positive sentiment towards South Africa and the fact that we always have electricity these days, this is rather odd.

Ironically, the improved sentiment is part of the reason why the share price is under pressure.

You see, Clicks isn’t a growth story. Sure, it tends to grow at or ahead of inflation in most periods, but not by much of a margin anymore. This is a defensive play that faces disruptive forces in retail that shouldn’t be ignored, such as online shopping adoption. The real money gets made in the front shop, not at the dispensary, so Clicks faces significant price competition at all times.

Defensive, sure. Bulletproof? No.

When investors are scared to take risk in a market, defensive stocks trade at premium valuations. The market has always seen Clicks as an “expensive” but overall safe bet from an investment perspective. When sentiment improves and investors are willing to rotate out of defensive names, that safe bet can very quickly become a position that is sitting in the red.

Even after the share price fell 6% on the day of the trading update, Clicks is on a meaty price/earnings (P/E) multiple of 23x. When you can buy far more interesting growth stories in South Africa at significantly lower multiples, the Clicks multiple becomes tough to justify in the context of comparable sales growth of just 3.7% in the 20 weeks to 11 January 2026.

There’s a mitigating factor here: system implementation issues led to stock shortages in the Western Cape during this period. This issue would’ve worked its way out the system soon, so investors will look for an improvement in sales growth from February onwards.

But the bigger concern isn’t temporary in nature. Clicks is facing margin pressure, with a highly competitive market for deals over the festive trading period. South African consumers are absolute bargain hunters by nature, leading to a difficult environment for local retailers. Record Black Friday sales are a good indication of this.

I’ve yet to see a single analyst or investor describing Clicks as “cheap” at these levels, so the current 52-week low (April 2025) is at serious risk of being breached through further selling pressure.

Truworths: when bad is good enough

Truworths has lost a third of its value in the past year. The market has quite rightly punished the weak group performance that has been dragged down by the Truworths Africa business. But on the same day that Clicks shed 6% in response to a trading update that at least reflected growth, Truworths closed 5% higher after letting the market know that group sales would be flat for the 26 weeks to 28 December 2025.

I’ll say it again: share price responses are all about expectations vs reality, not just the reality.

Currently trading on a P/E of 8x, Truworths is viewed by the market in a similar light to how you would see your most irritating family member: if they just avoid starting a fight or drinking too much at the family gathering, everyone views it as a victory. If Truworths manages any earnings growth whatsoever, it’s a miracle.

So, was there any earnings growth? Well, barely – between 0% and 2% in headline earnings per share or the period. With group sales coming in flat, that’s a decent outcome for shareholders. Margin mix is undoubtedly a factor here, as Truworths Africa saw sales decline by 3.6% vs Office UK up 7.1% (as reported in rand). Another helpful outcome is that gross margin improved in Truworths Africa, mitigating some of the pain from the sales decline.

Some punters for this stock have clearly emerged recently, but the overall concerns about Truworths Africa remain. A strong performance in the UK business is doing all the work right now – and we know exactly how fragile the offshore performance can be. DM