Margin squeeze to put pressure on retail stocks

RETAIL stocks are expected to be in the spotlight when the stockmarket reopens this morning after a four-day break as investors assess how much shoppers spent during the Christmas sales period.

By InvestSMART · 28 Dec 2011

By InvestSMART ·
28 Dec 2011

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RETAIL stocks are expected to be in the spotlight when the stockmarket reopens this morning after a four-day break as investors assess how much shoppers spent during the Christmas sales period.

While there is little in the way of domestic events to influence the local market, the AMP Capital Investors chief economist, Shane Oliver, says retail stocks, which have been pounded in the past fortnight, will be one item of interest.

"If there has been any pick-up in spending, it could be seen as a positive thing and they could have a bit of a recovery," Dr Oliver said yesterday. "Retailers are the ones that might be most volatile."

A slew of companies issued earnings downgrades or presented bleak outlook statements in the lead-up to Christmas. Kathmandu, Billabong, JB Hi-Fi and David Jones had said they expected trading to be weak during the Christmas period.

Dr Oliver said anecdotal evidence from some retailers suggested sales were at similar levels to last year's Christmas trading. "They are selling more volume, but the total revenue sales figure was the same as last year, so the margins have been squeezed," he said.

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Frequently Asked Questions about this Article…

Why are retail stocks expected to be in the spotlight when the market reopens?

Retail stocks are likely to attract attention because investors will be assessing how much shoppers spent during the Christmas sales period after a four-day market break. With several retailers issuing weak trading updates before Christmas, any signs of stronger or weaker spending can move retail share prices.

How could Christmas sales results affect companies like Kathmandu, Billabong, JB Hi‑Fi and David Jones?

Those companies had warned of weak trading during the Christmas period, so if Christmas sales turn out better than expected it could be seen as a positive and prompt a recovery in their shares. Conversely, continued weak spending would reinforce their earlier earnings downgrades or bleak outlooks.

What does a 'margin squeeze' mean for retail companies and everyday investors?

A margin squeeze means retailers are selling similar or higher volumes but earning the same total revenue as last year, implying they’re cutting prices or offering more discounts. That reduces profit margins and can pressure earnings, which investors should watch when evaluating retail stocks.

Why have a number of retailers issued earnings downgrades or bleak outlooks before Christmas?

A slew of companies reported expectations of weak trading over the Christmas period, prompting them to downgrade earnings or warn of a tougher outlook. These pre-Christmas statements reflected concerns about consumer spending and margin pressure.

Are retail stocks likely to be more volatile than other sectors right now?

Yes. According to AMP Capital’s chief economist Shane Oliver, retailers could be the most volatile sector because their near-term results depend heavily on consumer spending and Christmas trading outcomes.

If retailers sold more items but total sales stayed the same, what does that tell investors?

That situation suggests retailers moved more volume but at lower prices, so total revenue didn’t increase. For investors, it signals margin compression—companies may be sacrificing price to drive sales, which can hurt profitability.

What indicators should everyday investors watch to gauge the health of the retail sector?

Watch post‑holiday sales reports and trading updates from individual retailers, announcements of earnings downgrades or outlook changes, and commentary on margins. These indicators will show whether consumer spending is improving and whether margins are recovering or remaining squeezed.

How could a pickup in Christmas spending influence retail share prices?

A pickup in spending could be interpreted positively by the market, potentially triggering a recovery in retail share prices as investors reassess earlier warnings. However, any improvement needs to translate into stronger revenue and margins to sustain a meaningful share price rebound.