Big names teetering on the edge
After JB Hi-Fi and Harvey Norman, who will be next to post a profit downgrade? THE dollar might be falling, official interest rates going down and bags of cash ready to be handed out by the federal government, but unless it translates into more spending in the next few weeks, downgrades in the retail sector will be aplenty.
After JB Hi-Fi and Harvey Norman, who will be next to post a profit downgrade? THE dollar might be falling, official interest rates going down and bags of cash ready to be handed out by the federal government, but unless it translates into more spending in the next few weeks, downgrades in the retail sector will be aplenty.With about six weeks to go until the close of books for this financial year, a few listed entities have already warned of a less than flash profit season. But most have chosen to hold their fire.It makes for an interesting situation as anecdotal evidence suggests things are worse than the official ABS retail sales figures for March, which showed Australian retail sales managed to break their six-month slide in growth with a 0.9 per cent month-on-month increase its best in nearly a year, and well ahead of a consensus forecast of 0.2 per cent.Indeed, a well-regarded industry survey of retailers, wholesalers, consultants and suppliers conducted by Evans & Partners in April described the sales outcome for April as "alarming" and showing a significant widespread deterioration. The findings of the survey, used by industry operators and high-net-worth investors to pick emerging trends in listed retail stocks, is consistent with the recent 16 per cent profit downgrade by JB Hi-Fi for 2012 and the massive 44 per cent profit fall in Harvey Norman's third-quarter results or a 24.8 per cent fall for the nine months to March 31.It raises questions over which retailer might be next. There is already speculation that Billabong is considering a profit downgrade after chairman Ted Kunkel refused to discuss its profit guidance at an analyst briefing last week to announce a new chief executive.The big white hope for the sector is that the falling dollar below parity, the cut in official interest rates and last week's move by the federal government to introduce stimulus measures via cash handouts might save parts of the sector from a round of profit downgrades.The Evans & Partners survey asks participants to rate trading conditions on a scale of zero (weak) to 10 (strong), with five as the mid-point representing an "in line" result. The overall results showed widespread deterioration. "While we must take into account both variables caused by the timing of Easter and that April 2011 was relatively strong, the weakness in this month's sales outcome is alarming. Significant deterioration was widespread and consumer electronics was particularly disappointing off an already low base," it says.The survey revealed that consumer electronics was particularly weak, with discounting more pronounced and customers more selective. In terms of profit margins, the greatest weakness was in the household goods segment, while the greatest improvement was in sports, leisure and entertainment.In terms of sales channels and locations it noted that only online delivered improvement in April, with shopping strips and airports suffering the greatest level of weakness.In other segments, wholesalers reported a fall in supermarkets in April, discount department stores showed some relative improvement on last month and department stores continue to disappoint on sales from branded wholesalers.The knock-on effect of weak retail sales is profound across the supply chain. It can lead to a build-up of inventory, which is a profit killer for retailers, and result in tighter margins.For Billabong, the concern is margin risk and its retail strategy for David Jones the risk is focused brand strategy for Harvey Norman the concern is mature and competitive and consumer electronics exposure growth but competitive consumer electronics exposure for JB Hi-Fi and for Myer the issue is perennial low sales growth.Not surprisingly they have become the focus of some hedge funds who are punting that something radical will need to be done to arrest their falling share prices. In the case of Harvey Norman, its plunging share price will no doubt hit the screens of private equity looking to extract value by breaking up the company. With a market capitalisation of $2.1 billion, and an investment property portfolio valued in the books at almost the same, Harvey Norman has reached the point where something needs to be done to stop the rot.While there is little doubt that macro-economic factors, such as weak consumer spending, the crisis in Europe and the internet, are challenging the entire retail sector, the reaction of most companies to the negative retail climate through discounting has become a race to the bottom. The decision to buy sales by heavily discounting and leaning on suppliers to fund promotional activity is a vicious circle as it trains consumers to wait for sales. The rest of the sector is then forced to follow, and so it goes on.But there are some segments that have managed to rise above it all and produce solid results, these include hardware, which, according to the survey showed a solid month of sales and gross margins.In the past year, the retail sector has been littered with profit downgrades and several collapses, including Borders, Angus & Robertson, Colorado and Fletcher Jones. The jury is out on what the rest of the year email@example.com
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free
Join the Conversation...
There are comments posted so far.