David Jones' announcement of a third consecutive drop in quarterly sales confirms that lean times in discretionary retail spending continue, particularly in the premium department store sector.
The good news is that the pitch of the sales decline is levelling out. The worrying part is that this is considered a good outcome.
The state of the market is sufficiently poor that for the past year or so David Jones' response has been to defend profit by essentially slowing the business down. It has been applying the brake to revenue by buying less inventory, to ensure the sales it does book are more profitable. In the retail trade
they call this boosting the gross profit margin.
From a management (and shareholder return) perspective it's probably the right strategy. But it also demonstrates that most retailers have not found a formula to grow their businesses in this cyclical downturn. Most retailers are playing very hard but these are usually defensive moves.
The structural response to department store changes has been too slow. In David Jones' case, it was a flat-earther when it came to recognising and responding to online retailing. Having said this, its catch-up has been impressive.
CEO Paul Zahra's discourse is now all about being ready to capture profit gains when consumers open their wallets. But neither he nor his competitors know what the trigger will be.
Investment bank CLSA's research suggests it won't be the election. Its report on Australian consumer behaviour suggests half those surveyed don't think the election will lead to better economic management. In other words, it reckons there is no "election trade".
The falling exchange rate could be a sleeper. Zahra believes local consumers haven't fully registered that their online purchases from, say, US rival Nordstrom have gone up in price as a result of the falling dollar, and they won't know it until they have to pay their credit cards.
How this plays out for local retailers over the medium term will be interesting, assuming the Australian dollar remains at this level or even falls further.
If after the election the government decides to attach a 10 per cent GST to online purchases below $1000, the competition game between Australian and offshore retailers gets more interesting. (The GST imposition probably isn't close. It costs Treasury coffers between $700 million and $1 billion a year, depending whose numbers you use, in tax but the cost of administration doesn't make it compelling yet.)
It certainly won't provide a cure-all for local retailers and the particularly challenged premium department stores.
But the more confronting aspect of the CLSA research is that the higher-income earners - the people who shop in David Jones - are relatively more vulnerable in this economic climate.
For example, lower-income earners are less concerned about being fired or receiving lower than expected pay rises and their spending outlook is more positive.
All income groups expect to increase savings and decrease credit card spending.
And, interestingly, when it comes to spending discretionary income, the most resilient sector is holiday travel. Maybe that's why David Jones' revelation that it dropped only $8 million in sales in the 2013 fourth quarter (against the fourth quarter last year) came as a relief to many analysts. They were expecting David Jones' same-store sales, which fell 2.9 per cent, to be worse, down about 3.7 per cent.
Deutsche Bank said the Bureau of Statistics data implied non-discount department store sales were off 4.3 per cent for the quarter to June 30. DJs fared better than that, but there must be an expectation among investors that sales numbers will turn positive soon.
Zahra has made inroads into protecting the profit line from the harsh sales environment through tight inventory management and scaling back the price discounting that has become viral in many areas of Australian retail. Only two years ago David Jones was operating some kind of promotion sale activity for four months out of six.
Zahra says he has found the right mix of discounting, but weaning customers off the discounting drip will come at some cost to sales.
The big driver of new sales is clearly the group's online offering, which boosted sales 770 per cent on the fourth quarter, 550 per cent in the third quarter and 288 per cent in the second quarter. Despite these heady improvements, online still accounts for only 1 per cent of sales.
The flip side is that fewer customers came though David Jones' stores during the period. But the average value of each transaction was greater.
Zahra was making no promises in his commentary about sales. The biggest problem area was home electronics, which experienced a double-digit decline. David Jones will soon be using the Dick Smith concession model, which will arrest some of the sales volatility.
David Jones had positive sales numbers during the quarter in women's apparel and cosmetics, while menswear and children's clothes were flat. A warm start to spring bodes well after Australia's disastrously warm winter.