The interim results from Woolworths and Harvey Norman summed up the marketplace for the country’s retailers.
With few exceptions (Coles Group, Country Road and JB Hi Fi) it’s been very tough for the past six months or so and there doesn’t look to be any sign of change appearing soon.
The much discussed consumer caution is the buzz phrase at the moment, although in many cases the impact has been to either slow or retard sales growth, but not profitability.
Myer had bad figures and a fall in profit was signalled, David Jones had a smaller fall in sales, but it stuck to its guidance for a 5% rise in profit, Coles Group lifted earnings by more than double the 6.7% rise in sales.
Even Woolies managed to lift earnings 6% against a 4% rise in sales (and even slower on a same store basis).
Perhaps the reason is cautious consumers, but the impact of the strong Australian dollar and falling international prices for a range of consumer electronics (LCD RVs, computers, laptops and netbooks and mobile phones) are also playing a part.
The Australian dollar isn’t going to fall sharply any time soon and consumers will still be cautious (Wednesday’s fourth quarter National Accounts will tell us how the national savings rate went in the three months), so investors shouldn’t be expecting retailing to come storming back any time soon).
And there’s the management question, especially at Woolies, where some weekend commentators reckon CEO Michael Luscombe won’t be at the retail giant at the end of the year after chairman James Strong issued a statement after the profit result in which he said Woolies had a succession plan and no more would be said.
On Friday Harvey Norman’s chairman Gerry Harvey was busily distancing himself even further from the silly tax internet shopping campaign he was involved in just after Christmas.
But the 17% fall in his company’s earnings (after a slide in sales) was as much due to the intense deflationary impact of supplier price cuts and the poor performance of his stores in Ireland (a disaster area) and New Zealand (which will be hit badly by the impact of the slowdown the country will find itself in as the impact of the second Christchurch earthquake hits hard). The stronger Australian dollar impacted all these points as well.
Woolies’ 6% rise in earnings (driven by an 8% rise in foot and liquor) was slower and lower than Coles Group.
But more importantly, the group’s figures as a whole were the worst for more than a decade as Big W and the Consumer Electronics divisions saw earnings and sales fall.
Big W’s earnings before interest and tax were off 17.1% and its consumer electronics division’s earnings were down 36%.
For the past two years the rate of growth in Woolworths’ sales has been steadily declining and the retailer has missed its own target for sales of growth in the mid-single digits in the past two halves and earnings growth, while still above the rate of increase in sales, has slowed dramatically.
Woolies also announced it will buy direct wine marketer Cellarmasters from private equity firm Archer Capital for $340 million.
That’s a distraction to the main game which is improving returns from Big W, Dick Smith and Tandy and getting the supermarkets back firing on all cylinders.
Woolies is still super profitable, the ebit margin (earnings before interest and tax, the best measure of performance) rose by nearly a third of a cent in the half year to 6.76c in the dollar, from 6.45c, even if there was a small rise in the company’s cost of doing business. That however is left less than 20c in each dollar of revenue, which is still highly efficient.
Those two measures are key to Woolies performance and the longevity of Michael Luscombe as CEO. Lose control of either (especially costs) and he will depart, just as former CEO Reg Clairs went in the late 1990s when costs start growing alarmingly.
Woolworths said net profit before one-offs rose to $1.16 billion, from $1.095 billion a year earlier.
In January, Woolworths cut its earnings growth forecast for fiscal 2011 by as much as half (to a range of 5% to 8% from as much as 11%, predicting cautious consumers would continue to spend less.
Revenue rose 4.2% to $28.42 billion.
The company will pay an interim dividend of 57c a share, up from 53c in the previous corresponding period.
The company amended its full year profit guidance.
Full year net profit growth is now expected to be in the range of 5% to 8% and earnings per share is likely to rise 6% to 9%.
In a statement, Woolworths said the extent of the negative impact of consumer confidence levels, inflation, interest rates and global economic conditions had been "greater than expected", particularly on discretionary spending.
"Given the experience of the recent six months a degree of uncertainty exists over the next six months trading," the company said in a statement on Friday.
"The market is expected to remain competitive with a less confident consumer who is spending less whilst having a greater propensity to save."
This combined with the uncertainty around the level of inflation, risks of future interest rate rises and a continuing strong Australian dollar provides a "platform for a potentially subdued trading environment," Woolworths said.
"This uncertainty, together with incurring costs, not covered by insurance, associated with the NZ earthquakes and the Australian floods resulted in Woolworths amending its guidance."
Woolies shares rose 1.3%, or 35c, to $26.85 at the close on Friday
