Retail's Good, Bad and Ugly

Coles Myer released its half-yearly results today, which was good in one respect; it allowed us to forget about the sale of the Myer department stores and concentrate on what is really counts in the retail sector '” sales growth.
Coles Myer’s results showed growth at a disappointing 2.9% across the entire group. Although smaller segments of the Coles Myer business showed good growth (Coles Express and Officeworks grew by 15.3% and 6.4% respectively), its core business of food and liquor sales grew just 1.5% in the first half of the 2006 financial year.

When you compare this to Woolworths '” which recorded growth in food and liquor sales of 15.3% over the same period '” it’s clear where the problem is, and it’s not in mens' wear. Despite these differences, the vital statistics of each company is remarkably similar. Coles Myer has a price/earnings (P/E) multiple of 22 compared with Woolworths' 23. Yields are more or less the same: Coles Myer 3.2% and Woolworths 2.9%.

Another player in the grocery market is Metcash, whose high P/E reflects its recent $3 billion deal with Woolworths to carve up food manufacturer Foodland. Metcash is horizontally integrated with IGA supermarkets across Australia, which is as good a reason for investor confidence as any.

At the boutique end of the spectrum is David Jones. Fresh from winding back its failed high-end food store concept, the retailer has gone from strength to strength. David Jones enjoys a modest P/E and reasonably generous yield for the sector. Investors have been falling over themselves to buy this mid-cap company as we’ve seen by the stock double in price over the past 24 months.

The Warehouse Group is about as far from boutique as you can get. With a strong presence in both Australian and New Zealand, it’s a good example of a listed retailer that turned out to be a huge disappointment. It remains expensive (even for this sector) with a P/E of 29.3, which is only marginally compensated by its modest yield of 4.1% a year.

Putting the grocers aside for the moment, the popularity of electronic consumables has given specialist retailers a huge boost in the past 18 months. Harvey Norman, after putting in several disappointing years has begun to take off. Its prominent locations ensure that anyone who wants to drop a few thousand dollars on a plasma television is only ever a few blocks from the nearest Harvey Norman store. Broker upgrades saw it rise about 20% over a couple of days a week ago.

Equally well positioned is JB Hi-Fi, whose strategy of covering every available piece of floor space with stock and reducing margins to next to nothing appears to be paying off. Much like Harvey Norman, its recent outperformance has ensured its P/E has caught up to the sector average.

In retail clothing, two worth mentioning are the Just Group and Colorado. Both faltered in the late 2004 before the Just Group turned itself around and recently announced plans to expand to South Africa. Colorado, on the other hand, appears to be in freefall from its December 2005 highs of $6.51 (it debuted at $1.01 in December 1999) and offers the highest dividend yield of all the stocks listed. Unsurprisingly, the Just Group’s P/E is almost double that of Colorado.