As we head towards the new financial year, Australian retailers have joined in the great global sell off of retail shares in the first half of 2014.
The Financial Times points out that across the UK and Europe, the retailing sector is the worst performer among the 19 groups in the major market measuring indexes, with losses approaching 4% over the past six months.
In fact across the major global market measures of performance, retailing is the only sector to have fallen this year.
Australia is no different, the ASX 200 Consumer Discretionary index (which measures mostly retailers of all types) is down 3.7% up till yesterday from the start of 2014, against a 0.6% rise in the ASX 200 in the same time.
Retail stocks under pressure
As the graph shows the consumer discretionary segment outperformed the ASX200 until mid March when they crossed over and the index started sliding.
Significantly that would have been around time when many retailers knew of how their first quarters were going and the outlooks were being adjusted because of the slowdown from the strong opening to the year when sales according to the Bureau of Statistics were running at more than 6% annual (seasonally adjusted).
And if you look at how the major retailers have performed this year, Woolies shares are up 6.3%, Premier Investments up 4.6% and David Jones are up 30.6%. The last two are linked, and plus Woolies impact means they have stopped the index from falling more, as the losses for other stocks would indicate.
Wesfarmers ares are down 5.1% since the start of the year, Myer, more than 22%, Super Retail, nearly 36%, Kathmandu, 5.5%, The Reject Shop shares have lost 49%, Speciality Fashion Group’s shares are down nearly 5%, RCG Corp, just on 19.5% and Noni B shares have fallen just over 20%, but were down 40% before a possible buyout or takeover appeared after a big profit collapse was announced earlier in the month.
The slide in the Consumer Discretionary Index has in fact trended lower as the retail sales reports from the ABS have slowed from a 1.2% rise in January to just 0.2% in April.
The Consumer Staples index (which covers companies making products mostly sold through retailers) is off 2.56%. That weakness seems to be in part a result of spillover in the adverse investor sentiment towards retailers.
The near 20% slide in the price of Pacific Brands shares has helped push the Staples index lower.
Now some of these price falls have resulted from weak to weak sales as a result of the warm autumn weather hurting retailers and their suppliers, and the downturn in consumer activity after the budget.
But many retailers have specific problems (as we see in most economies), and there are well-known and much-hyped structural shifts within the industry itself (such as the internet), and there are the one off factors (such as the impact of weather in the US and Australia).
Ignoring David Jones and Country Road, the better performers seem to be in food supermarket retailing, such as Woolworths and Coles. (Bunnings is a strong performer, but that hasn’t helped Wesfarmers.)
Globally, there seems to be a significant change underway in market sentiment towards the retailing sector around the world.
The FT and other analysts also point out that hedge funds and other big short term investors have picked the consumer discretionary/staples sector as the one they are short in because they reckon many companies are over-priced.
That’s also a sign retailing is now on the nose and ripe for pickings from the market vultures.
This turn away from retailing has emerged as one of the major investment trends of the year so far – and when you discount the influence of weather (on the US in the first quarter and Australia for autumn and early winter) explanations for the loss of confidence in retailers don’t easily come right away.
In Australia the impact of the gradual loss of consumer confidence, compounded by the negativity around the 2014-14 Federal budget, has added to the woes of the sector.
But the trend to falling retail shares seems to have been more noticeable in the US, parts of Europe and the US and the weakening has occurred despite the rebound in economic growth and household spending, especially on some big ticket items, such as cars in the US and across Europe and the UK.
Retailing in Japan has been destabilised by the rise in tax on April 1 which dragged for a lot of demand, and then seen a slide in activity in April and May.
Offshore analysts say this negativity is now even impacting internet retailers – for example Amazon, the great destabiliser of all things retail, has seen an 18% slide in its shares in the past six months.
If you look at some one off situations, Sears and JC Penny in the US, plus Radio Shack and Best Buy have been hurt by company specific situations – poor management mishandling attempts to turnaround or restructure existing companies, (Sears and Penny) or a failure to respond to the internet (Best Buy and Radio Shack).
In Australia Metcash, the country’s third biggest retailer, is in the early months of an attempt to restructure and improve its performance in its core business – grocery retailing and wholesaling.
On the other side, David Jones’ share price performance has been boosted by the bid from Woolworths of South Africa and so have the shares of Country Road in the past month or so.
But its David Jones early 2014 share price performance was weak until an upturn in sales occurred, while Country Road saw a surge in revenues and profits as the impact of two big acquisitions kicked in, which triggered a rapid price rise in the first four months of the year.
The slump in Myer shares has followed the failure of its attempt to merge with David Jones and the then the appearance of Woolworths with a counter bid that won approval from the DJs board.
In Britain the share prices of big retailers such as Tesco (the largest in the UK and the third largest globally), Sainsbury and Metro have all dropped. William Morrison, a mid range supermarket chain in the UK has seen its shares fall nearly 30%, while Tesco is down 5%, as is another industry leader in J. Sainsbury.
In the US the damage is greater with a host of big names from Whole Foods (the biggest organic supermarket chain in the world), Staples (Office products), Bed Bath & Beyond, Best Buy and Coach (luxury goods), all down 20% or more so far in 2014.
The explanations (apart from the weather and one offs such as bids and failed restructurings) are varied. The internet is blamed, but many retailers are developing their response through so-called omni channels (multi ways of dealing with customers, both on the buy side and the fulfilment side.
Wal-Mart is one retailer whose online/omni channel strategy seems to be working, but its shares are down close to 5% so far this year, so internet success is no longer a way retailers can be re-rated by the market. Wal-Mart’s online business is now growing faster than Amazon’s according to the latest quarterly reports.
In Australia, Coles (owned by Wesfarners) and Woolworths have built their online sales up to more than a billion dollars (annual rate). That is of course a fraction of existing sales, but the strategy is being constantly refined to try and drive deeper into their customer base.
The situation in the UK and parts of Europe seem to be more linked to the aggressive growth of so-called ‘hard discounters’ such as Aldi (present in Australia) and Lidl (which is not here).
Both have doubled their combined share of the UK supermarket business in the past couple of eyars and in the first five months of the year grew sales at more than double the rate of much bigger competitors.
This has hurt Morrison especially, but Tesco and Sainsbury have also moaned about the damage to their sales growth that these privately owned retailing giants from Germany are causing.
So much so that Tesco, Sainsbury and other big supermarket chains have launched a price war fight back, at the obvious cost of damaging profit margins, which has helped push share prices lower as investors fret about the possible profit falls and lower dividends.
In Australia Woolworths shares are around $36, higher than the start of the year when they were just over $34, but they are down on the peak of $38.92 at the end of April.
Wesfarmer’s shares are down, despite selling off its insurance arm and solid results from Coles and Bunnings.
David Jones can be ignored because its shares have been boosted by a takeover offer. Rival Myer’s shares are down because of weak sales growth, high costs and the failure of its play for DJs to go through.
Now for the reporting season from late next month. It won’t look nice for some.
