Brookes spooked, with good reason
He cited Wednesday's Westpac-Melbourne Institute index of consumer confidence for May as evidence, and it's persuasive.
The Australian economy will grow by 2.75per cent this year according to the budget, with unemployment staying below 6 per cent. Wall Street shares are up 6per cent in a month and by 17.4 per cent since Christmas, and Australia's S&P/ASX 200 Index is up more than 4 per cent in a month and up 26 per cent in a year. Despite that the consumer sentiment index fell by 7 per cent from 104.9 to 97.6 in May.
The index has been compiled monthly since January 1975, and a score of 100 indicates that optimists and pessimists are balanced. Its high was 123.9 in May 2007, at the apex of a boom that saw confidence mutate into hubris, laying the foundations for the crash that followed.
Its low was 79 in July 2008, when the global crisis was two months short of a climax that almost brought the financial system undone: July 2008 was May 2007's polar opposite: a time of well-founded high anxiety.
After its latest fall the index is still 2.4 per cent higher than it was a year ago. Pessimists outweigh optimists for the first time since October last year, however, and the index is in reverse despite a cut in the Reserve Bank's cash rate from 3 per cent to a record low of 2.75 per cent on May 7.
Sentiment was positive at 103.4 in December 2011 by way of comparison after the Reserve kicked off its rate-cutting program with consecutive monthly cuts of a quarter of a percentage point that pushed the cash rate down to 4.25 per cent, and Westpac chief economist Bill Evans thinks this month's budget is one of the reasons sentiment is so weak now. Consumers don't like the budget cuts, and have been spooked by the reason the government has given for them - a collapse in tax revenue that renews concern about the strength of the economy.
He says a key question is whether the reaction to the budget fades quickly or endures, but the May result certainly suggests that Brookes' unease about consumer demand is justified.
Last week's profit downgrade from the Wesfarmers-owned Target retail chain also came after warm winter conditions that have created an inventory overhang in the industry that will be cleared by margin-squeezing discount sales, and the $A is a wild card.
Myer cut stock levels by 7 per cent in the first half of the current year and Brookes says there has been no slippage since, but if competitors cut their prices to clear stock he will need to respond.
A declining dollar boosts the price of imports, but Myer has hedged the currency above parity with the US dollar for a year on direct purchases that account for about 20 per cent of sales.
The impact on goods it imports through agents depends on the hedging strategies the agents have deployed, but Brookes argues that a falling dollar is an overall plus for Myer. All retailers are affected by a currency shift, he says, and a lower dollar makes overseas internet shopping more expensive and also attracts tourists who shop in the big city stores.
Competitive pressure on the retailers isn't easing, however, and the consumer sentiment index gives little reason to hope that it will soon.
Cutting carefully
The restructuring that Telstra's chief operations officer, Brendon Riley, has flagged will create headroom for Telstra to invest in growth without blowing its budget, but almost certainly involves substantial job losses in Australia, where about 15,000 employees are affected.
Telstra will reorganise operationally into five groups, and three of them - IT Solutions, Networks and Customer Service Delivery - are new. They and existing operations covering the national broadband network and a Telstra growth engine, Network Applications and Services (NAS), will have common support functions, and the telco will be allocating fewer resources to shrinking businesses, including its fixed line network, and more to growth engines like NAS, a one-stop communications offer to businesses that is being rolled out in Australia and Asia.
A 10 per cent jobs cut in Australia would carve out 1500 positions. Net job losses would be lower because Telstra will be increasing employment elsewhere, but a sizeable portion of the new jobs will be overseas.
There's no alternative. Telstra has to sweat its legacy assets if it is to free funding for growth. It needs to manage the changes carefully to avoid an internal push-back, however, because domestic operations are going to be squeezed.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Myer announced a small 0.4% quarterly sales rise, marking its fourth consecutive quarter of sales growth, but CEO Bernie Brookes said he remains concerned about consumer demand. His unease is backed by the May Westpac‑Melbourne Institute consumer sentiment index, which fell and suggests shoppers may be more cautious despite market gains.
The consumer sentiment index fell 7% in May from 104.9 to 97.6, slipping below the 100 neutral mark. For investors, a drop like this signals weaker consumer confidence, which can lead to softer retail spending, pressure on retailers' margins and heightened risk of profit downgrades in the consumer sector.
The Reserve Bank cut the cash rate from 3% to a record low of 2.75% on May 7, but the Westpac chief economist cited this month's federal budget cuts as a key reason sentiment remains weak. Consumers were reportedly spooked by budget cuts and the government’s stated reason — a collapse in tax revenue — which renewed concerns about the economy's strength.
Target downgraded profits after a warm winter left the industry with an inventory overhang. Retailers are likely to clear excess stock with discount sales, which squeeze margins. For investors, this signals potential short‑term pressure on profits across apparel and seasonal goods retailers.
Myer reduced stock levels by about 7% in the first half of the year and reported no slippage since. However, CEO Bernie Brookes warned that if competitors cut prices to clear stock, Myer may need to respond with its own promotions, which could compress margins.
A declining Australian dollar raises the cost of imports, but Myer has hedged roughly 20% of sales on direct US dollar purchases above parity for a year, softening immediate impact. Brookes also argues a lower dollar can be a net positive by making overseas internet shopping more expensive and drawing tourists into Australian stores. The effect on goods imported via agents depends on those agents’ hedging.
Telstra plans to reorganise into five operational groups, creating new units such as IT Solutions, Networks and Customer Service Delivery, while reallocating resources to growth areas like Network Applications and Services (NAS). About 15,000 employees are affected, and a 10% cut in Australia would remove roughly 1,500 positions, though net losses may be lower as some hiring shifts overseas. The goal is to free funding for growth by sweating legacy assets.
Watch the consumer sentiment index (Westpac‑Melbourne Institute), corporate profit downgrades and inventory levels (as seen with Target and Myer), central bank cash rate moves, federal budget signals about tax revenue and spending, currency direction (the Australian dollar) and company restructuring plans (like Telstra’s). These factors can influence sales, margins and earnings outlooks for retail and telecom stocks.
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