Retail: It’s Tough, But Not As Bad As The Under Performers Say.
March 23rd 2012 – Australasian Investment Review – (AIR)
With the reports in the past week from Myer, David Jones, Kathmandu and OrotonGroup we know Australian retailing had a tough six months or so at the back end of 2011 and early this year, but has it been as tough as much of the reporting and commentary suggested?
Yesterday, in the wake of the poor reports from David Jones and Kathmandu, media reports talked about the dismal state of the Australian retail sector having been laid bare by those updates.
But is that the case?
Interim results from the retail sector this half year have not been uniformly bad or terrible, nor have they been overwhelmingly positive.
But they have ended for now the sharp rebound in retail stocks (David Jones up 15% till a week ago for the year for example, Kathmandu up 9%) that out ran the broader market.
The key ASX index for retailers, the Consumer Discretionary Index was up around 10% this year to its peak last Friday, before this week’s slide.
The broader market was up around 5.7% and much of the out performance happened as retailers started their reporting in early February.
It has been an expensive correction for a lot of investors and embarrassed retail analysts.
Like the rest of the economy, retail is patchy, but do the poor results of David Jones, Myer, Harvey Norman and Kathmandu and the sluggish performance of industry leader Woolworths indicate a widespread malaise?
A ‘no’ would be the answer because there have been enough solid profit results and sales performances to suggest that management and execution of retail strategy might also play a big part in the ultimate performance of a company, especially in the current uneven retail environment.
Another weak result came Friday morning from Melbourne-based Premier Investments, controlled by Solomon Lew.
Premier, the owner of retail brands such as Just Jeans and Portmans, suffered a 2.4% fall in first-half profit to $38.5 million, compared with the $39.4 million earned in the previous corresponding period.
Earnings from The Just Group, the company’s retail operations, fell 2.3% to $51.3 million in the period to January 28.
The Just Group includes the Just Jeans, Jay Jays, Jacqui E, Peter Alexander, Portmans, Dotti and Smiggle brands.
But not all results were as weak for the first half of 2011-12.
For example, take the performance of luxury goods retailer OrotonGroup in the first half.
Net profit up 4% to $16.1 million, up from $15.4 million in the same period in the previous year. But the shares were sold down for no real reason.
Total revenue rose 13.4% to $99.1 million from $87.4 million for the first half of 2010-11.
Like-for-like sales (the most accurate way of assessing sales performance) rose a solid 9%, with growth in its Oroton branded stores 5% higher and its Ralph Lauren chain up 6%.
Profit margins fell, but that is still a very good result.
And if you look at the results from Coles (owned by Wesfarmers), they were close to the industry best for the half year.
Coles had earnings growth in the half of 14.1% to $656 million, double the rate of revenue growth.
Its hardware chain Bunnings saw earnings up a solid 6.1% to $485 million.
Kmart and Officeworks reported earnings growth of 12.6% to $197 million and 9.1% to $34 million, respectively.
But it wasn’t all success at the Wesfarmers retail empire; Target’s earnings of $186 million were down 9.7% compared to earnings in the first half last year.
The reason: lower customer numbers and reduced margins due to heightened promotional activity in the market.
That sounds very much like the problems at David Jones and Myer, not to mention Harvey Norman.
The Kmart improvement (under Guy Rossi, a former McDonald’s executive) suggests that department store activity isn’t all that hard when you do the simple things right, like lower prices all the time, getting rid of the ‘sales’ cycle and listening to staff and improving stores.
And still in conventional retailing we had a very good result from another tiddler in Noni B.
After miserable trading in late 2010 and early last year, the company’s management restructured and cut costs and fiddled with the retail offer of women’s fashionwear (at a modest price).
The outcome was a jump in net profit to $2.4 million in the six months to December, from $1.5 million in the six months to December 2010.
Its bigger competitor in this area Specialty Fashion Group was slow to move and saw profits collapse in the December half.
It is now restructuring by closing stores and trying to boost its online offering.
And The Reject Shop, which a year ago was battling to keep afloat after being hit by the floods around Brisbane (they damaged a newly opened huge distribution centre at Ipswich, costing the company lost sales and millions of dollars in costs), managed to keep its head above water in the December half year with a 4% rise in earnings to $16.6 million.
Directors said “Sales for the half grew by 6.1% from $275.9 million to $292.8 million. First quarter sales were significantly impacted by uncertainty over the timing of the reopening of the Ipswich distribution centre and restricted capacity to service stores.
“The positive second quarter comparable store sales of 1.0% reflected a strong seasonal trade supported by improving distribution capacity as the Ipswich distribution centre was progressively reinstated.”
That small rise in same store sales compares with the 6% to 10% falls at David Jones and Harvey Norman.
Compared to the problems The Reject Shop faced in 2011, Myer, Harvey Norman and David Jones had it easy.
They only had to confront cautious consumers, the high dollar and the growth on online retailing. A near company breaking experience with mother nature wasn’t in their business mix in 2011.
And speaking of Harvey Norman, it did it tough, but was its retail strategy at fault and not the market, the dollar or online?
Harvey Norman saw a big fall in sales and profits (and cashflow, the lifeblood of a company plunged, to just $19 million in the six months to December).
Sales growth was negative for the quarter here and offshore.
Dividend was cut and the company is reportedly changing its retail mix and franchises in many of its outlets to reduce consumer electronics and to lift the company’s exposure to traditional products such as furniture and bedding.
Its biggest competitor JB Hi-Fi found it tough in the half year, but managed to ride out the storm without a whinge or moan, unlike the comments from Gerry Harvey, Myer executives or Solomon Lew.
The company reported a flat net profit of $79.6 million but increased its interim dividend 1¢ to 49¢ (a rarity in the retail sector this reporting season).
That was on a 5.5% rise in topline sales (they were down 5.5% on a same store or like for like basis and were also down nearly 4% on the same basis in the first six weeks of 2012).
And the car industry is another part of retailing, despite being ignored by most business writers and the Australian Bureau of Statistics insofar as including them in its monthly retail trade data (as the US Government does).
Automotive Holdings of Perth is the country’s biggest car retailer. It reported in February that first half revenue rose 4.2% to a record $1.538 billion. Pre-tax and interest and depreciation earnings rose 2.1% to $49.6 million.
The company said car sales fell 3.6% in calendar 2011 according to ABS data, so that wasn’t a too bad of a result.
Brisbane-based Super Retail Group did well in the December half, even accounting for the positive impact of the Rebel Sport purchase in October.
Overall net profit was up 40% to $34.9 million while the original core auto and cycle retailing businesses saw sales increase rise 6.3% to $383.3 million.
Flight Centre, the listed travel business reported record sales and profits, as did its smaller competitor Webjet and Wotif.
The latter are basically online businesses, the former is bricks and mortar and online. Caresales.com did well as did the listed realestate.com.au.
All reported sharp rises in sales and profits. All are retailers, in one way or another.
All underline the idea that the retail sector might be patchy, but it is not as dismal as much of the media and some of the older line groups make it out to be.
And finally, here’s another result which media writers and other analysts rarely lump in with retailers: Retail Food Group pushes coffee, bread, donuts, (now pizzas), sweets and pastries.
It reported a 9% lift in first half profit to $13.6 million.
It is squarely in the cafes, takeaway etc sector of retailing which, according to the ABS sales data, has performed best over the past five years.
While US-owned McDonald’s is another company doing well in this area, the listed Collins Food Australia saw earnings slide sharply as customers stayed away or cut their purchases of KFC and Sizzler products.
It has to be emphasised that all results, interim, quarterly or full year, are historical and no real indication of future performance.
But they do provide a valuable clue to how a company might go in the future, especially if they have done well in a patchy retail environment, as we have at the moment.
The next six months are going to be just as worrisome as the first half was.
We know David Jones is forecasting a fall of up to 40% and Myer claims its 19% first half fall will improve to an annual drop of just 10%.
Other retailers haven’t been so game.
So keep an eye on Woolies (naturally), Coles and the other chains in Wesfarmers, Noni B, Super Retail Group, The Reject Shop, Retail Food Group and JB Hi Fi as indicators, first in the update period from May through to early July, and then in the reporting period in August and September.
Negotiating these choppy conditions is tough, but lifting sales and profits will always be a sign of solid management and a strategy in tune with what customers want.
It sounds so simple, but it is one of the hardest things to get right in business.
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