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Now it's the retailers who need therapy

Recovery will take longer than predicted, writes Michael Evans.

Recovery will take longer than predicted, writes Michael Evans.

The warnings started coming more than six months ago.

First, an unexpected interest rate rise last November. Then floods and cyclones across the east coast at the start of the year. Then retailers began noticing that consumers had discovered a new frugalism. Lately it's been fears of a carbon-inspired Big New Tax that has played into negative consumer sentiment.

But it took an admission from upmarket retailer David Jones that conditions were "unprecedented" to wake investors to the fact that retailers, one of the engines of the Australian economy and one of the biggest employers, are enduring a dire funk.

Immune for so long to the impacts of rising interest rates, higher petrol prices and external shocks because of its traditional well-heeled customer, David Jones' profit warning prompted a sharp sell off across retail stocks.

If the better off are struggling, how is everyone else coping?

"David Jones's comments highlight how challenging retailing conditions are at the present," Will Seddon from White Funds Management told Bloomberg.

"Aussie retail clearly continues to be stuck between a rock (spending preferences shifting to offshore travel and a more conscious consumer) and a hard place (structural shift to online retail)," said Richard Coppleson, Goldman Sachs institutional dealer.

Of retailers, some will be able to weather the storm because of diversified earnings, while others face a tough winter.

Investors and analysts have been forced into a rethink of the industry. What's certain is any retail recovery will take longer than previously anticipated.


Supermarkets in Australia and New Zealand, discount department stores Big W, consumer electronics Dick Smith, liquor stores and hotels.

Latest guidance: "The negative impact of consumer confidence levels, inflation, interest rates and global economic conditions continue. The market continues to remain competitive with a less confident consumer who is spending less whilst having a greater propensity to save. This combined with the uncertainty around the level of inflation going forward, the risks of future interest rate rises, and a continuing strong dollar provides a platform for a potentially subdued trading environment particularly in the discretionary sectors."

Forecast: Issued a profit warning earlier this year. Net profit is now expected to be in the range of 5 to 8 per cent and earnings per share growth for the full year of 6 to 9 per cent.

Share price: $27.40, fell 0.3 per cent yesterday, up 1.6 per cent this year.

Verdict: While discount department stores and consumer electronics may struggle in a renewed downturn, Woolies' dominance in supermarkets and liquor is set to offset significant pain.


A conglomerate that includes retail assets Coles supermarkets, discount department stores Kmart, Target, office supplies Officeworks and homewares store Bunnings.

Latest guidance: "Expectation of continuing consumer caution and competitive market conditions in retail" and "trading is expected to remain challenging, especially for the Group's department store retailers given ongoing price deflation, driven by a competitive retail environment and comparatively strong Australian dollar".

Share price: $30.02, fell 2.6 per cent yesterday, down 6 per cent this year.

Verdict: Discount department stores may struggle with cuts to discretionary spending, yet Coles has generated momentum in its supermarket division. Also benefits as a conglomerate from its diversified earnings in coal and insurance.

Myer Holdings

Department stores.

Latest guidance: Myer said in May it anticipated trading conditions would remain challenging for the remainder of financial year 2011.

Forecast: Yesterday it affirmed Myer continues to expect net profit after tax for 2011 to be up to 5 per cent below last year's NPAT of $169 million.

Share price: $2.48, fell 6.4 per cent yesterday, down 30 per cent this year.

Verdict: Myer's share price has struggled since its sale by private equity. While it affirmed 2011 guidance yesterday, investors were concerned it didn't comment on 2012 prospects.

David Jones

Department stores.

Latest guidance: "The dramatic and rapid deterioration in trading conditions in the fourth quarter has been unprecedented."

Forecast: Full financial year 2011 profit after tax declining by 0.5 per cent to 2 per cent versus last year.

Share price: $3.20, fell 18 per cent yesterday, down 28 per cent this year.

Verdict: A surprise and a shocker. So long immune to price shocks like higher petrol prices and interest rate rises because of its traditional well-heeled shopper, the size of the downgrade sent shockwaves through the sector. New boss Paul Zahra is in the spotlight amid questions over his management of market expectations of guidance.

Harvey Norman:

Consumer electronics.

Latest guidance: "Furniture and bedding franchisees ... [are] experiencing a slow down with the dampened housing market. Electrical franchisees continue to operate their business in an extremely difficult environment. Price deflation has affected revenues in the TV category ... [and] tough trading conditions. Computer franchisee sales continue to be impacted by a very competitive market driven by a cautious consumer. Significant price deflation exacerbated by the strong Australian dollar was experienced in the key laptop computer category."

Share price: $2.30, fell 4.6 per cent yesterday, down 22 per cent this year.

Verdict: A bruising six months for Gerry Harvey continues. A poorly conceived campaign calling for a stop to shoppers being able to buy goods tax free online backfired. The troubles continue in his Irish business given the woes in Europe. Back home, big ticket items are often the first discretionary wares to take a hit.

JB Hi-Fi

Consumer Electronics and audio, video.

Latest guidance: "Sales since the start of January have remained tight as high levels of discounting and the impact of price deflation continued. Whilst we anticipate a volatile and competitive market in the second half, we are confident that the JB model can deliver another record year of sales and earnings."

Forecast: The company expects sales in 2011 to be circa $3 billion and net profit after tax in the range of $134 million to $139 million, which is a 13 to 17 per cent increase on the prior year.

Share price: $15.65, fell 5 per cent yesterday, down 13 per cent this year.

Verdict: While exposed to the difficulties at the discretionary end of the market, its traditional younger shopper isn't burdened by mortgages and fears over the economy. That said, they are buying increasingly online. Goldman Sachs notes the stock has been heavily shorted.

Premier Investments

Operates Just Group range of stores, including Just Jeans, Jay Jays, Portmans, Jacqui E, Peter Alexander, Dotti and Smiggle.

Latest guidance:"Like other ... retailers, Premier is operating in an extremely challenging retail and macro-economic environment. As noted, this environment deteriorated through the second quarter and there are no current signs of improvement in the third quarter. Natural disasters ... [have] impacted consumer sentiment. The Australian political environment is dominated by discussions about cost of living increases, with consumers uncertain as to their spending power. Retailers are also facing significant cost pressures, including dramatic increases in cotton prices."

Forecast: Premier expects that Just Group pre-tax earnings for 2011 will be in the range of $80 million to $85 million.

Share price: $5.70, fell 3.9 per cent0 yesterday, down 8 per cent this year.

Verdict: Former DJs boss Mark McInnes has a broad portfolio of stores to manage at a tough time in the cycle and at a far more exposed end of the market.


Women's fashion.

Latest guidance: "Margins were affected by the difficult market conditions."

Forecast: After-tax profit for 2011, before any goodwill impairment, is expected to be in the range $0.6 - 0.8 million [compared with] 2010, $3.9 million."

Share price: 58c, fell 9 per cent yesterday, down 45 per cent this year.

Verdict: Mums often cut back on themselves first when the family budget gets tight. The women's retailer got out early with a profit warning last week.


There's no share price fall like David Jones.

Elizabeth Knight, Page 8

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