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'Tis the season to be crunching numbers

13 Dec 2012 THE AGE
BY MALCOLM MAIDEN - MMAIDEN@FAIRFAXMEDIA.COM.AU


CHRISTMAS retail trading and the big stocktaking sales that follow it and spill into the new year are make or break for retailers that sell discretionary merchandise - the stuff we'd like to own but don't actually need. The season is make or break for investors in the retailers, too, because the merchandise retailers generate more than half their annual sales and around a quarter of their annual profits at this time.

Retail chains, including Myer and David Jones, take a punt on the Christmas season every year. Months before it begins, they take a view on how strong trading will be, and place their orders with suppliers. They gamble not just on the overall strength of demand but on consumer preferences and trends, and the penalties for getting either call wrong are large.

If they order too little or order merchandise that customers don't want, they will miss out on sales they would have captured by making wiser calls. Even worse, if they are overconfident and order too much, they will be left with unsold stock that may need to be dumped later at discount prices, and be funded on their balance sheets until it is sold. This commitment phase of retailing is part art and part science, and the calls the retailers make at that time are kept confidential for obvious reasons.

By this time of the year those earlier judgment calls are rapidly being replaced by cold, hard numbers, however, because everything that the big retail chains sell is tracked by computerised inventory systems, and scanned by barcode at the point of sale. By bringing sales and inventory management online they have created a rolling computerised audit of turnover, and that raises an interesting disclosure issue: the retailers have a good insight into their Christmas trading already, and their vision gets clearer every day. It's just that they don't tell the market what they can see.

The continuous disclosure regime requires all listed companies to disclose market-sensitive information, so Myer, David Jones and other listed retailers would have a disclosable event on their hands if their Christmas sales tanked, undermining earnings guidance. If that catastrophe is avoided however, they can sit on their confidential sales reports and watch investors, analysts and anyone else who is interested read retail tea-leaves.

We've had several tea-leaf readings this week that suggest that the trading numbers less than two weeks from Christmas Day are underwhelming.

One came on Tuesday, when the National Australia Bank said that its survey of business conditions and business sentiment for November was parlous. NAB saw no signs that Reserve Bank rate cuts were working, and said that businesses continued to be reluctant to borrow and expand.

The closely watched index of consumer sentiment that is maintained by the Melbourne Institute and Westpac followed on Wednesday, and it, too, was downbeat.

The consumer sentiment survey was completed after last week's decision by the Reserve Bank to cut its cash rate to 3 per cent, but consumer confidence nevertheless fell by 4.1 per cent, ending three months of gains including a 5.2 rise in November.

Consumers are more upbeat than businesses are. On the NAB's scale where zero is neutral, business conditions were minus 5 in November and business sentiment was minus 9, the weakest since April 2009. Consumer sentiment in December fell to 100 in the Melbourne Institute-Westpac survey, but that is the point where optimists and pessimists are balanced. Consumer confidence about household finances over the next 12 months also improved by 4.6 per cent. Mortgage holders pulled it higher, suggesting that for them at least, rate cuts are resonating.

The economic weakness implied by the NAB's business survey seems to be infecting consumer thinking, however. Consumers downgraded their expectations for the economy by 8.9 per cent, and their perception of the best time to buy a major household item weakened by 4.8 per cent.

The retailers were already fairly cautious about their prospects. Myer chief executive Bernie Brookes, for example, pleasantly surprised the market in mid-November by producing a 0.8 per cent sales rise in the three months to the end of October, but limited himself to predicting that Christmas would be "at least flat, maybe better". David Jones chief executive Paul Zahra also said Christmas was likely to be flat when he announced that DJs had squeezed out a 0.3 per cent sales increase over the same period, its first top-line lift in two years.

How the weak sentiment surveys sit with a slight up-tick in trading conditions since mid-year that the two department store groups and smaller chains including JB Hi-Fi have mentioned is a mystery, and while the big retailers are beginning to see how it resolves, as noted they aren't telling. The information blackout that surrounds this crucial trading period continues to be maintained.

The retailers could turn on the lights by issuing regular trading updates during December and January, with requisite warnings about the preliminary nature of the sales data, and the danger in making comparisons with earlier seasons or predictions.

They would be meeting a higher disclosure obligation than other listed companies meet if they did so - but then again, other companies do not have so much of their annual income pouring in over such a short period of time.

Will it happen? Not on my watch. The technology exists, but the retailers are not being asked to use it to inform the market more frequently, and aren't going to offer it up. In fact, they actually would like to dump quarterly sales reports. Can somebody pass the tea leaves?

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