Retail's ghosts of Christmas past

The sharemarket response to Kathmandu's shock earnings downgrade was telling in its ferocity, particularly as there had been a significant sell-off of retail stocks already this month.

Given the swelling stream of downgrades from retailers, it shouldn't have come as a surprise that Kathmandu has been impacted by the retail malaise. The surprise lay in the speed and extent to which sales and earnings have fallen away.

Something similar emerged within the profit warning from Billabong earlier in the week, with that group saying comparable store sales for the first two weeks of December were down 18 per cent on the previous corresponding period.

Kathmandu had been tracking quite well. For the first 15 weeks of the half-year, to November 13, it generated 17.6 per cent sales growth on a constant currency basis and comparable stores growth of 9.2 per cent.

In the subsequent five weeks, however, the sales growth turned negative. For the 20 weeks to 18 December sales growth retreated to 10.6 per cent and comparable stores growth to 2.8 per cent and the company is now warning that first-half earnings will be lower than last year's. Like Billabong, Kathmandu hit something of a wall in November and the first couple of weeks of this month.

The JB Hi-Fi story was slightly different. Its downgrade last week was margin-driven rather than sales-driven, with the company saying that second-quarter sales had actually improved after a first quarter decline. Competition and price deflation in consumer electronics is savage.

Across the retail sector there is disappointment with the lead up to Christmas. Consumers, as they have been since the financial crisis erupted, continue to be in a risk-averse savings mode. Personal credit growth is minimal while retail deposits are still growing at historically unusual levels.

As Kathmandu's Peter Halkett said today, foot traffic is down generally and so is the average spend in stores.

It is a problem that compounds because the downturn in sales creates inventory issues which encourage aggressive discounting that has a leveraged impact on gross margins. JB Hi-Fi essentially accused some of its competitors of simply dumping stock below cost to get rid of excess inventory.

Two Reserve Bank rate cuts that have been passed on by the banks have failed to open the wallets of consumers who have demonstrated unease about both the global and domestic economic settings throughout the year.

It isn't helping the traditional retailers that online retailers (including their own sites) are having a record Christmas, although online still represents only a modest proportion of retail sales.

The first signs of a structural response, not just to the growth in online retailing but perhaps also to a recognition that there may be too much retail space and too much high-priced retail space in this market, have been emerging with Myer and Just Group starting to rationalise their portfolios of stores, closing some outlets and down-sizing others while upgrading their online presence.

JB Hi-Fi and Kathmandu, however, still see store openings as drivers of their future growth.

The pressure on retailers being exerted by reluctant consumers and evolving channels will continue to test business models, balance sheets, management capabilities and formats.

Colorado, Borders and Fletcher Jones have already gone under and it won't be surprising to see others follow, given that this Christmas sales period is cycling the depressed numbers from last year when the RBA and the big banks ruined Christmas for the retailers by raising rates in November.