Retail shares have taken a pounding this year as investors moved away from defensives and into cyclicals and more deeply into resources and banks.
That’s a normal pattern when the economy is recovering from a bit of a slow down (which we had).
There’s also the gathering concern that without the underpinning of the government stimulus spending, the sector will find it tougher to grow sales and profits this year, especially in the June half year.
Weak retail sales figures for February haven’t helped sentiment either, or anecdotal reports of slowing spending and interest by consumers.
Myer kicked off a big aggressive national sales campaign this week and the shares hit a new low of $3.10 in trading yesterday.
The two were probably a coincidence, but there’s definitely a heightened nervousness about the outlook for the likes of Woolworths, JB Hi-Fi, Harvey Norman, Myer, David Jones and Wesfarmers (Coles Group and Bunnings).
This sensitivity received a boost with a poor nine month sales report for Harvey Norman, which revealed signs of a sharp slide in sales growth in the March quarter, even as the company omitted any comparison, unlike last year.
It did blame the sharp rise in the value of the Australian dollar in the quarter against the euro and the NZ dollar and the pound, all of which hit the translation of the company’s sales from stores offshore.
The dollar has also risen against the greenback, making more and more of its high-priced consumer electronics products cheaper, at a time when it is becoming harder to shift them, forcing the company to revert to more and more discounting.
Myer, Woolworths and Wesfarmers shares are all down 5-10% in the past month to six weeks. David Jones is off around 10%, JB Hi Fi, the sector star, has done a little better, and is off around 4%.
Woolworths reports its third quarter sales figures next Friday, and that will give us a clearer idea of how the sector is travelling.
After the warning bells in the Harvey Norman report this week, yesterday’s market update on third quarter sales from Wesfarmers added to the nervy feeling.
Wesfarmers expressed caution about the 4th quarter trading outlook after reporting a 4.9% rise Coles supermarkets sales for the quarter.
Stripping out convenience and petrol sales, the rise was 3.9%.
Comparable store sales were up 3.8%, mainly reflecting the Coles chain, while liquor sales weakened.
But across the entire group, including Bunnings, there was a clear slowing in sales growth in the quarter, especially on a comparable store basis which is the best measure of performance for retailers.
Sales for Coles food and liquor and convenience was $6.92 billion compared to $6.59 billion for the first quarter of last year.
Total Coles food and liquor sales for the financial year to date were $17.684 billion, up 6.1%, with comparable (or like for like or same store) food and liquor store sales growth of 5.3%.
Coles reported 1% food price deflation for the quarter.
Total home improvement sales for the three months to March 31 rose 7.9% to $1.544 billion. Officeworks sales grew by 7.1% in the quarter.
Sales at department store Target were steady with the third quarter of last year at $725 million.
They effectively went backwards after inflation, and comparable store sales were down 2% for the quarter.
Kmart sales rose 4% to $824 million, as did comparable store sales for the quarter. They were up by just 1.6% in the second quarter.
Managing director, Richard Goyder, said in yesterday’s statement that the retail division’s sales performance in the third quarter was pleasing overall given the back drop of rising interest rates and the positive impact of the federal government’s fiscal stimulus packages on retail sales in the prior corresponding period.
"Progress on strategies across the retail businesses remains on track," Mr Goyder said in a statement on the group’s third quarter retail sales.
"Solid volume growth, particularly in the group’s turnaround businesses, continues to show that customers are responding well to improvements in retail offerings.
"The group remains cautious on the outlook for the fourth quarter of the financial year, particularly given the impact of the federal government stimulus on trading in the prior corresponding period."
For supermarkets and Bunnings, top line and comparable store sales growth for the quarter were well under the rates for the nine months so far.
Coles supermarkets had nine months topline sales growth of 6.1% and 5.3% comparable store growth, against the 3.9% (topline) and 3.8% comparable store growth reported for the quarter.
Bunnings had quarterly sales of 7.9% top line growth for the quarter with total cash sales were up 7.9%. For the nine months topline sales were up 11.4% and cash sales were up 11.9%.
Officeworks showed a similar comparison.
The absence of the stimulus spending from a year ago has had an impact, but that impetus had mostly gone by the final three months of last year and sales growth in this latest quarter has slowed further.
For Wesfarmers as a whole though, watch the returns from coal: they will soar with higher coking coal (and thermal coal) price settlements kicking in from this quarter onwards.
The returns will be more volatile now that the company is moving (like BHP and others) to quarterly pricing, but they will offset any weakness in
