The most important update so far for 2013-14 came last Friday in the surprise news from Super Retail Group (SUL) that earnings and sales would be lower and slower than previously expected, thanks to a combination of reasons including reluctant consumers and some IT problems in the merging of the group’s existing business with the Rebel sportsgood operations bought over a year ago.
The news of course saw the shares shed 14.2% last Friday and more again yesterday. They closed up 4.1% or 45c at $11.24 as investors bought back into a stock that should had been oversold on Friday’s weak report.
But for the retail sector as a whole and for investors generally, the most important part of the update was this paragraph:
"Gross margin in the Leisure Division is below expectation, primarily as a result of a higher than planned level of promotional discounting across the division’s three businesses during the Christmas sales period," Super Retail explained.
In other words, as many investors and analysts had feared, Super Retail had to cut prices to get shoppers interested.
The question now is how far this margin sacrifice extended to the rest of retailing, especially in the important December Christmas period which is the most important month for the sector each year.
It has been a similar message in the US and the UK for the Christmas-New Year period, so local investors should not get too pessimistic, but we will have to watch some companies closely in the next month as they get closer to reporting their interim results.
Certainly Friday’s market trading after Super Retail’s update was release, gives us something of a check list of retailing stocks to watch.
For example, shares in JB Hi Fi fell sharply, ending the week down 9.1%, with more than a third of that happening on Friday. JBH Hi Fi shares continued falling yesterday, losing another 3.6%. That is a significant price correction in six days of trading.
Myer and David Jones both lost more than 2% on the day and Myer is on the lists of most analysts to report weak sales and earnings figures because of the well reported problems with its website over Christmas and the New Year. Both stocks lost a little more ground yesterday – one and two cents respectively.
Super Retail’s shares lost a total of 16.7% for the week (and were down more than 20% at one stage on Friday after the news was released, which again tells us how febrile investor confidence is when there’s bad news in the air).
SUL 1Y – Super Retail’s key warning for retail sector hits hard
But there were also factors specific to Super Retail, such as the IT problems, which won’t be seen in the results of other retailers. Its leisure division (Ray’s, BCF) saw an 8.1% rise in topline sales in the half year, but only 1.6% on a same store basis. That less than budgeted sales growth saw profit margins in the division fall and generate much of the problems.
Super Retail reported a 6% rise in first half group sales for the 2013-14 financial year, a result that the company said was brought about by the slowdown in mining investment and internal administrative problems.
The retailer, which own brands such as Rebel, Supercheap Auto and Ray’s Outdoors, said its group sales in the 26 weeks to December 28 rose to $1.096 billion. The group said it expected to report a net profit after tax of between $61 million to $62 million for the same corresponding period – an increase of between 0.7% to 2.3% from the previous year.
Super Retail Group’s chief executive Peter Birtles said there were a number of short-term internal issues, such as the roll-out of a new IT system and supply problems in the auto division, that pulled down the overall result.
"The impacts of the mining slowdown and cannibalisation from new stores on like-for-like sales performance in our leisure division have been higher than expected," he said in a statement to the ASX today.
"Increased promotional activity to drive sales performance impacted gross margin but did not achieve the projected sales uplift."
Mr Birtles said the internal difficulties had been addressed and the firm was implementing measures to strengthen gross margin in the three divisions in the second-half of the financial year.
Costs were not a problem with the company telling investors that "operating costs tracked in line with expectation and are slightly below the prior comparative period as a percentage of sales".
