The impact of a sharp downward shift in consumer confidence and spending that started ahead of the federal budget is now flowing through to downgrades in earnings for consumer-facing businesses.
Anecdotally, the slide started in mid-March as speculation about what might be in the budget burgeoned. The reality of the budget announcement and the subsequent controversies and debates haven’t helped confidence.
For retailers and their suppliers, the damage has been compounded by an unseasonably warm autumn, which has left them carrying a lot of excess stock within a fiercely competitive and price-driven environment.
That’s the position that both The Reject Shop and Pacific Brands have found themselves in, hence the profit downgrades both companies made today. With both groups in the midst of retail network expansions, the impact of a bulge in inventories and sliding sales has been magnified.
For Pacific Brands there is an additional relatively unique adverse factor. It has a very big position in workwear at a time when the resources and industrial sectors are under acute pressure and shedding jobs. That’s probably not a temporary phenomenon.
Pacific Brands is only halfway through a five-year strategy designed to reduce its reliance on its traditional wholesale activities by building retail channels for its brands. That necessitates both investment in its physical and online channels as well as heavy investment in the brands.
Its downgrade of its expectations for earnings before interest and tax for this financial year from about $105 million to between $90m and $93m doesn’t fully reflect the extent of the pressure John Pollaers and his team have suddenly found themselves under.
A better insight is provided by a blowout in net debt relative to the group’s position at the end of the December half, from about $170m to between $250m and $260m. That reflects the combined impact of the lower earnings, higher working capital, increased capital expenditure and extra restructuring costs.
Pollaers has placed a lot of emphasis on the retail strategy as a means to escape the throttling pressures Pacific Brands had experienced from its dealings with the major supermarket and discount department store chains. It has no option but to continue on with the strategy and the extra investment it entails.
It does have about $200m of headroom within its existing debt facilities to help fund the transformation but it was notable that the group also announced it had appointed Macquarie Capital today to undertake another strategic review of a group that has spent the best part of a decade undergoing a continual and comprehensive restructuring.
One assumes the purpose of the review is to identify and cull the weaker brands within the portfolio and ensure that Pacific Brands doesn’t experience another episode similar to the near-death experience it had during the financial crisis years.
The Reject Shop blamed the warm weather and its store opening program for its downgrade of its net profit, from the previous guidance of $17m to $18m to between $14.5m and $15.5m. It said sales had been solid until the first week of May (ahead of the budget) but had then been significantly affected by the drop-off in consumer confidence.
Given the continuing debates about the measures in the budget and the prospect that, like the previous Labor government, the Abbott Government’s agenda will be frustrated to a significant degree by the make-up of the Senate, it is unlikely that there will be a significant turnaround in consumer sentiment and spending in the near term.
The continuing unusually warm weather isn’t going to help move the mountains of unsold winter stock retailers are holding, even though some have pushed back the timing of their usual mid-year sales in the hope that they’ll be able to generate a bit of full-price margin before their promotions start.
That’s another development that hasn’t helped Pacific Brands and, when combined with everything else that has impacted the group in the past month or so, would suggest the group is again experiencing one of those 'Murphy’s Law' moments that it has become all-too familiar with in the past several decades.