Analysts weren’t expecting a bumper Christmas period; the general expectation was for relatively steady sales growth to finish the year. However, sentiment in the retail sector has taken a negative turn after disappointing trading updates from key retailers. Should this be cause for concern?
Super Retail Group (ASX: SUL) and The Reject Shop (ASX: TRS) were among the first major retailers to announce trading updates for the first half of 2014. Both announcements were below expectations, and the market became nervous that sales across the sector may disappoint. But upon examination of each retailer’s commentaries, it seems that the weakness is predominantly attributable to company-specific factors.
Super Retail Group reported 2.3 per cent like-for-like (LFL) growth in its auto division, 1.6 per cent LFL growth in the leisure division, and 5.5 per cent LFL growth in its sports division for the first half of financial year 2014. While the company commented that the slowdown in the mining sector contributed to the slowdown in leisure, much of the overall underperformance was due to “short-term internal challenges”, of which the CEO is confident have been addressed.
The Reject Shop also posted weaker than expected numbers (we discussed the update in depth here). While lower foot traffic in major shopping centres was cited as a reason for the disappointing sales, we consider that the issues were predominantly due to poor inventory management.
In both instances, the weaker results were arguably due to internal factors, rather than external ones. However, this has failed to curtail the negative sentiment. This is reflected in the ASX200 Consumer Discretionary Index and the ASX200 Consumer Staples Index falling by 4.5 per cent and 3 per cent respectively in January.
JB Hi-Fi (ASX: JBH) was considerably impacted by market sentiment, with its share price falling 16 per cent in the month of January. Yet the company provided a trading update which indicated steady performance. While there was some concern over the shortfall in gaming consoles (due to supply constraints), we believed that the weakness in the share price was not a reflection of the underlying value of the business, and so decided to acquire a position.
Another retailer that reported results that conflicted with the negative sentiment was Country Road (ASX: CTY). The company achieved comparable Australasian sales growth of 5.5 per cent in a “highly competitive market”. Country Road anticipates that the competitive pressures will likely persist in the second half of 2014, but expects to deliver further improved results for the remainder of the financial year.
Finally, CFS Retail Property Trust (ASX: CFX) reported relatively stable sales results from its tenants for the 12 months to 31 December. Supermarkets and retail specialty stores reported annual growth of 4.1 per cent and 1.7 per cent respectively. Department stores reported negative annual growth of 1.7 per cent, but this should not surprise given the structural problems of this sector. According to Michael Gorman of CFS Retail: “Underlying drivers for retail expenditure in the Australian economy, on balance, remained stable during the period. Positive wage growth and consumer sentiment, coupled with rising wealth effects from growth in housing prices and the Australian stock market, have been tempered by factors such as weaker employment growth and rising petrol prices”.
On the whole, it seems that the disappointing results are company-specific rather than sector-wide. While caution is certainly warranted in this market, the recent sell-off across the sector may present opportunities more than threats.