Smart not yet prepared to call turn in market

The market has been desperate for a sign from any player in the discretionary retail space that the worst is over and some green shoots have emerged.

The market has been desperate for a sign from any player in the discretionary retail space that the worst is over and some green shoots have emerged.

So it is not surprising that investors took heart from the results delivered by consumer electronics group JB Hi-Fi on Monday and pushed the share price into overdrive.

Not because the numbers were great, just that they were not bleak and better than the market had expected.

This response is the best evidence to take that we are in a bull market cycle - by definition ignoring the downside and responding to positive news.

On the back of the JB Hi-Fi result for the six months to December 31 and some positive outlook for the remainder of the financial year, a bunch of retailers' share prices rode on its coat-tails. Harvey Norman, Myer and David Jones rose variously 6 per cent, 3.47 per cent and 3 per cent. If these companies don't match up to expectations, they will be dealt with accordingly as their results dribble out over the next couple of weeks. But as far as the market is concerned JB Hi-Fi is the one swallow that does make the summer.

While the market has made this call, JB Hi-Fi boss Terry Smart is not prepared to say the retail environment has turned or even bottomed. The company's forecasts for a better six months to June 2013 are based on some gains it has made but these may not be industry-wide.

Based on how it is now travelling the company forecasts net profit for the current year will be up between 3.8 and 7.7 per cent and the gross profit margin will improve.

(The gross profit margin is the difference between the cost of goods it buys and the amount it sells them for to consumers.)

Some of this improvement is due to a reduction in the intense price discounting that was around last year and some is due to JB Hi-Fi extracting better deals with its supplier. An easing in price competition is a good sign for retailers but it is still a tough market and Smart is not prepared to call a turnaround in consumer sentiment. His company's adaptation to this environment is slightly easier than most because it is a discount retailer with a low-cost operating model.

Thus it doesn't have as far to move to get closer to global pricing of goods, which is set by the online retail community.

In general, the consumer electronics category does not have as big a price gap to close compared with other categories such as apparel and cosmetics that for years have been sold in Australia at inflated prices.

Australia has been described as "treasure island" by retail industry observers because hapless consumers have been overpaying relative to the rest the international community and suppliers have been making a big margin out of it.

(This is a major reason Apple and Microsoft have been ordered to appear before a parliamentary committee and explain why Australian consumers pay far more than those overseas for information technology goods).

At this stage the much-watched retail television market - which has seen sales decline running at 20 per cent over the past couple of years - appears to be levelling out and has reached global pricing parity.

The prices for other goods such as computers and cameras in JB Hi-Fi are 10 to 15 per cent above global pricing, according to Smart.

Sales of goods such as music, movies and games are still going down and this trend will probably continue as the focus moves to online. The price adjustment has been a boon for consumers but a juggling act for retailers and their suppliers.

Lower prices are an enticement for consumers to buy but uncertainty has been a reason to hold off.

Smart says the retail environment remains unpredictable - there are good months followed by bad.

The response to JB Hi-Fi's performance and outlook also has much to do with the fact that the analysts were predicting flat to negative profit and shrinkage in the gross profit line. But even after taking all the particulars of JB Hi-Fi out of the equation the market can take something positive from the fact that December and January for most retailers were better than the disasters experienced in previous periods. Price deflation has not disappeared but has eased.

Smart is not prepared to venture what it will take for the consumer to shed the shackles of fear but other chief executives have been more forthcoming. Chief among the factors that weigh into consumer confidence are job security and the wealth effect.

The improvements in the prospects for the international economy have already led to a rise in the stock and property markets.

This plays well into the wealth effect. The fact that the jobs market has not deteriorated in any meaningful way has also helped - albeit the result of falling participation rates.

The calling of an election has probably proved to be more of a positive than a negative, given it should result in a decisive outcome.

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