Department store chain Myer Holdings has lowered its guidance for net profit in 2010-11, saying it now expects profit to be up to 5% below that of 2009, following a first half characterised by "fragile consumer confidence".
This follows earlier guidance last November when Myer said it expected profit to grow in 2010-11 by 5% to 10%.
The shares slumped sharply, falling 13% at one stage to $3.25.
They closed down 11.5% or 43c at $3.32. That’s the lowest since early last July.
Shares in direct rival, David Jones, also fell 4.2%, or 20c, to $4.53 as investors went off the pair.
In a trading update released yesterday, Myer said conditions had deteriorated since November, and it expected "the challenging retail environment" to continue into the second half of the year.
"A likely continuation of the increased costs of living together with the widely anticipated flood levy and food inflation are expected to put pressure on discretionary spend during the remainder of calendar 2011," Myer chief executive officer Bernie Brookes said in the update.
Brookes lined up a veritable cocktail of problems to blame for the shock downgrade, weak consumer demand, and the discounting it is generating among retailers.
Sales declined significantly in January after the Christmas period, and Mr Brooked blames the November interest rate rise for that, plus the higher other costs of living including the cost of electricity, health care and petrol.
Sales are also being hit by price deflation.
He says that’s showing up on retail sales numbers as the strong Australian dollar reduces the wholesale price of goods bought overseas, some of which is passed onto shoppers. But that also generates stock losses for retailers as the value of inventory is dragged down by the falling import and retail costs.
And Mr Brookes said the inclement and unusually cool summer on the eastern seaboard has also resulted in subdued demand for summer clothing and fashion-wear, and says the recent floods and the Gillard proposed government’s flood levy will compound the problem.
But none of these are unique to Myer alone.
The entire sector has been hit. It hurt the likes of JB Hi-Fi, but it still lifted sales and profit for the half year and is looking at a higher profit for the full 12 months.
Myer was hit yesterday because the company oversold its prospects at the time of the float in late 2009 and has stuck to this upbeat approach, even when it was apparent the retailing sector was slowing.
"Our preliminary expectation for NPAT for the first half of 2011 is in the range of $106 to $109 million" before residual costs from the store’s initial public offering," Mr Brookes said.
"Allowing for the continuation of the subdued consumer environment, we now expect the FY2011 NPAT to be up to five per cent less than last year compared with proforma NPAT of $169 million in FY2010."
Mr Brookes said the trading environment remained "unpredictable", and Myer would provide a further update with first half results on March 17.
"While it is disappointing that the tough trading conditions of FY2010 have continued, we remain very confident in the resilience and sustainability of our improved business model," Mr Brookes said.
"We have continued to invest in our business, including new stores and refurbishments, supply chain and information technology initiatives, plus our exciting new brands.
"As a result of this and our ongoing cost disciplines, we are well positioned to benefit from any improvement in trading conditions and consumer sentiment."
Myer said total sales for the half year ended January 29 were $1.733 billion, down 3.54% on the first half of fiscal 2010, but down 5.19% on a comparable or like-for-like basis.
Mr Brookes said trading conditions during the second quarter had been mixed.
"The unexpected November interest rate hike had an immediate and noticeable impact on sales in November and early December.
"Sales in the lead up to Christmas and first week of Stocktake Sale were in line with last year.
"However, there was then a significant, unexpected and rapid decline in sales in January.
"From late December, there was a deterioration in trading across Queensland, NSW and Victoria as a result of the devastating floods.
"Sales across many categories were impacted by price deflation as a result of increased discounting, as well as the strong Australian dollar, which made purchasing overseas more attractive," Mr Brookes said.
Mr Brookes said Myer’s consumer electrical business "continued to be challenging", affected especially by discounting of television sets.
Myer said sales had been affected too by its exit from whitegoods lines, and apparel sales had been hurt by the cool and wet start to summer as well as price competition.
But its homewares business had performed strongly, however, as had furniture and youth.
And analysts point out much of Myer’s problems stem, from its decision late last year to resume deep discounting to try and drive sales growth. That, as much as any of the factors mentioned, has hurt sales and profits.
In fact the discounting has made margin protection much harder.
The $4.10 issue price for Myer now looks even further away.
