Retailing's Mixed Report Card

Sydney, Oct 24, 2008 (ABN Newswire) - Because of annual meetings, updates and quarterly statements, this week has given us an unusually large number of reports from a wide mix of retailers, possibly the widest for a week that we have seen for some months.

Unfortunately, apart from Woolies and perhaps JB Hi-Fi, there's not much to write home or cheer about.

It's tough going and will continue that way until mid-December when some of the spending from the $10.4 billion stimulation package from Canberra will hopefully kick in.

In fact that package is being looked as perhaps 'saving Christmas' for the sector.

With the payments (apart from the extra training slots and the first home buyer's grants) targeted at the poor and families, the spending boost will more than likely be concentrated in Coles, Woolies, and retailers who pitch their advertising to small gifts, CDs, etc that don't cost the earth.

Big ticket items, such as high end TVs, computers, Ipods and Iphones won't feature as prominent as perhaps last year. Clothes will feature, especially at the cheaper end of the sector.

Overall, retailers reckon there could be $2 to $3 billion in extra spending happening from mid-December through into January and the post-Christmas sales.

Unless there's an upturn in overall spending from March onwards, it's likely advertisers, including retailers, will cut spending next year, meaning less for joint market efforts as the year goes on. 

So it looks like being a case of trying to grab the new dollars while they are still around.

Harvey Norman is the retailer most seem to be watching.

It's suffering a sales slump and has been since midway through last month, and even though chairman Gerry Harvey says he will cut advertising 20%, he told the Sydney Morning Herald yesterday that the hack hadn't happened yet.

He's half way through the commitment to issue rolling four week sales figures for a month to show how retail confidence is travelling. 

So far sales in the four weeks to October 12 were down 4.8% on a year ago and 5.7% in the four weeks to October 19.

That's tough going, but it seems that retailers in fashion, especially women's fashion, might also be doing it tough. Small NSW retailer, Noni-B pulled its guidance this week citing the tougher conditions.

One group that wasn't hurt was Melbourne-based Country Road.

It revealed this week that sales rose 22.4% in the September quarter, but it confessed to expecting conditions over the next six months to be much tougher.

Chief executive officer Ian Moir told shareholders at the retailer's annual general meeting in Melbourne that sales in Country Road's stand-alone stores rose 15.8% in the quarter compared with the previous corresponding period. 

Sales in department store outlets jumped by more than 27%. The quarter covered the period to September 27.

"To achieve the growth we have in the first quarter on lower promotional activity and in a difficult retail climate has been very satisfying," Mr Moir told shareholders this week.

But, he said, "the next six months are likely to be much tougher than the last six and we are managing our business accordingly."

The slump hasn't stopped the retailer from continuing to reinvest capital in its new outlets, without resorting to external finance.

He said Country Road expects to invest close to $20 million over the next year in stores from cash flow, working capital improvements and existing financing arrangements.

Country Road shares were unwanted at $3.54 (It has a very small free float)..

The update from Noni-B was very different to the news from Country Road.

The company had expected to generate a net profit between $6.5 billion and $7.5 million in fiscal 2009, according to the outlook statement in August.

But this week it changed that, blaming a significant slowdown in consumer spending on women's fashion which meant that result is no longer achievable.

"In view of the current economic uncertainty, with consumer confidence remaining weak as the key Christmas period begins, the company does not intend to issue revised earnings guidance," it said in a statement.

"Management has taken a number of initiatives to boost sales and reduce costs and will continue to review opportunities to improve profitability.

"Stock remains under control and cash flow remains positive."

Noni B reported a net profit of $2.54 million for fiscal 2008, which was 69.3% down on 2007. Excluding restructuring costs (mostly on closing its La Voca chain); net profit was $5 million.

Directors didn't give a new figure for the earnings guidance, but there was a hint of an unexpected bonus.

"In view of the current economic uncertainty, with consumer confidence remaining weak as the key Christmas period begins, the company does not intend to issue revised earnings guidance.

"Management has taken a number of initiatives to boost sales and reduce costs and will continue to review opportunities to improve profitability. Stock remains under control and cash flow remains positive.

"Most La Voca stock has been sold and there are no further lease commitments.

"Some stores have been converted to Noni B, and the remaining leases have been either surrendered or reassigned for a consideration of over $0.5 million."

And the bonus: "A significant part of the $2.5 million after-tax restructuring charge in the FY2008 accounts is expected to be written back in FY2009".

The shares were ignored yesterday and closed steady at $1.40.

But for a major supplier to retailers, large and small, it was a very different story at this week's AGM, also in Melbourne.

There, shareholders in Pacific Brands (Bonds, Berlei, Holeprooof, Yakka, Clarks shoes, etc) heard a warning from CEO, Sue Morphet that the economic downturn would mean flat profit growth over the coming year.

While telling shareholders that last year's acquisition of workwear brand Yakka would help provide a buffer against an anticipated fall in more discretionary spending, she said the manchester division, which includes Sheridan bed linen, was "and remains susceptible to the downturn in discretionary spending''.

When releasing the 2008 result in August the company forecast a flat result first half with a second half pick up in growth. This week Ms Morphet said that recovery now appeared further off.

"More recently we have seen a sharp decline in the value of the Australian dollar and significantly greater weakness in both retailer and consumer sentiment,'' she said.

Sales since the end of the financial year were below the company's budget, but Ms Morphet said the current half suffered somewhat in comparison with the same period a year earlier, which was "particularly strong''.

"Taking all this into account, we are comfortable with our ability to deliver the first half but have great difficulty in predicting the second. In summary, under the difficult circumstances, we would expect to be flat at best for the full year.''

She said the company would focus on controlling its costs and still had the ability to increase selling prices, although this could be at the expense of lower volumes.

Chairman Pat Handley (a former CFO of Westpac) was a bit more direct in his warning to the meeting.

He said that while market conditions had deteriorated over the course of the past financial year, he saw even tougher times ahead.

"As many of the economies with whom Australia does business are in recession, we will not be immune from their troubles,'' he said. 

He said the company expected to continue generating strong cash flows to fund shareholder dividends, with 73 per cent of last year's profit paid out in distributions.

"The intention of the Pacific Brands board is to continue to maintain a high payout ratio of net profit after tax and to frank dividends to the greatest extent possible,'' he said told the meeting.

Investors didn't like Pacific Brands yesterday: the shares dropped more than 10% to $1.42 in a tough day's trading.

The sector's star performer (besides Woolies) has been JB Hi-Fi over the last two years.

It has enjoyed explosive growth and has become the major competitor to Harvey Norman and the Dick Smith division of Woolworths.

It has already said twice in the past month that conditions remain buoyant and that it expects to make guidance, so long as conditions in the economy remain as they have been and don't worsen.

Shareholders at the AGM earlier in the month were told:

"Despite the current economic and retail environment and with the all important Christmas trading period ahead of us, the company remains confident that it will meet market expectations. 

"As previously advised to the market, trading in the first quarter has been solid and we maintain our previous sales guidance for FY09 of circa $2.35 billion or a 28% increase on FY08."

It told an investment conference this week that it was still on track and would open 13 new stores in the first half of the 2009 year, taking the total store network to 118 by Christmas.

"A further 11 stores are expected to open in the second half. The 24 stores to open in FY09 will be the biggest number of new stores that the company has opened in any year, which will help ensure its continued strong growth going forward.

"The 7 stores we have opened this financial year are trading well and we are confident that they will contribute strongly to earnings over the coming years as they mature.

"The $10.4 billion government package is positive for retail and timely for JB (e.g. families receive lump sum payment early December) as we are very much a Christmas gift destination retailer for small value items such as CDs, DVDs, games, iPods, cameras, navigation, etc.

"Some positive sentiment drivers appearing - lower interest rates, government support package, government bank guarantees and lower oil prices are helping to balance the negative sentiment from the financial crisis.

"Weak $A is good for consumer electronic retailers as it will stop or slow price deflation. JB does not import any products.

"A large percentage of JB customers are younger and thus have less or no negative sentiment, about shrinking share or super portfolios or declining or flat real estate prices. Retail spend is as much about sentiment as anything.

"JB specialises in entertainment. If consumers are cutting back elsewhere then it is likely that they will be at home more and will focus on home entertainment.

"As JB's average customer order value is $100, we are not reliant on considered purchases of large ticket items.

"Small percentage of JB sales are made with consumer finance – company less affected by current consumer reluctance to increase debt.

"Subject to the economic environment not deteriorating further, the company remains confident that it will meet market expectations for FY09, setting the company up in a strong position for FY10 onwards.

"Current guidance is circa 150 JB branded stores in Australia & NZ, i.e. stores which generate similar sales and earnings as our current stores.

"The company currently has 96 JB Hi-Fi branded stores. The company also believes there are further opportunities to open smaller format stores with similar product categories in smaller consumer catchment areas.

"The company will increase its focus on these opportunities as it draws closer to the 150 store target. The company expects to have 13 to 15 new store opportunities on average each year for the next four to five years."

JB Hi-Fi shares fell 6%, or 66 cents to $10.20. The market was off 4.4% because BHP and Rio fell sharply.

And Woolworths this week maintained its earnings and sales guidance for the first half after releasing solid first quarter sales figures.

The company reported a solid rise in the September quarter's sales.

Woolworths' CEO, Michael Luscombe, said first quarter sales hit $12.8 billion, which was up 9.6% on the previous year.

"This is a good start to the financial year. Particularly pleasing is the continued momentum in our Australian operations, with an overall improvement in comparable sales growth. 

"The significant re-investment in each of our businesses has continued to deliver positive results.

"We are mindful that discretionary spending continues to be influenced by macroeconomic factors and will be influenced by the recent events in global financial markets. 

"Subject to the uncertainty these factors create, we maintain our sales outlook for the full year where we expect sales from continuing operations to grow in the upper single digits." said Mr. Luscombe.

Woolies shares fell 61 cents to $26.50


 

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