Retailing To Worsen

Sydney, Nov 27, 2008 (ABN Newswire) - Forget those forecasting that Australia will escape the ravages of recession in 2009.

Prime Minister Kevin Rudd yesterday admitted a deficit would be possible next year, next a recession?

One of the country's biggest retailers is readying itself for a bigger retailing slump than in the 1990-91 recession.

David Jones is the country's leading department store chain; its forecasts, issued yesterday in its first quarter sales update, are the gloomiest yet from a leading company about 2009 and its prospects.

They indicate the retailer (which sells to wealthier people, so would be more exposed to a slump) doesn't believe forecasts that Australia will remain out of recession.

The Organisation for Economic Co-Operation and Development forecast a 1.7% rise in GDP next year here. That is based on information from Federal Treasury, the Reserve Bank and other sources.

The IMF is forecasting a 1.8% rise, the Federal Treasury, around 2%, the Reserve Bank around 1.75% (and a low of perhaps 1.5% mid year).

In its first quarter sales update, David Jones said it had set its business plan for the rest of 2008-09 on the basis that the slide in sales will be worse than was experienced during the last recession (Paul Keating's recession 'we had to have').

It said it saw like for like sales down 7.5% in each of the next three quarters, a significant worsening form its forecast in August of flat to negative sales for the 2009 year.

That forecast was blown apart after same store (or like for life sales) dropped more than 6% in the first quarter.

Total sales for the three months ended October 25 fell to $442.3 million, from $471.9 million in previous corresponding period.

Sales drops of 7.5%, especially on a like for like basis, are not indicative of a growing economy.

They show a deeply recessed level of spending by consumers.

Consumers make up around 66% of economic activity in this country, so a cut back of any size will have an impact. 

In a full year for David Jones a cut of 6%, say in like for like sales could see more than $120 million in sales stripped from the 2009 figure. (The fall in the first quarter was almost $30 million alone.)

If David Jones is right and consumers cut spending over the next 9 months, then we will have a recession, especially with economic growth in China now forecast at a 19 year low by the World Bank.

David Jones' statement came a day after Harvey Norman revealed as 32% drop in first quarter earnings because of slumping sales here, in New Zealand, Ireland and Singapore and Premier Group said its Just Group acquisition had experienced a drop in same store sales amid the worst retailing conditions chairman, Solomon Lew had seen in his 45 years in the business.

DJs said first half like for like sales fell 6.1% from the same quarter of the previous year, but the company remained on track for a 5%-10% lift in earnings in the first half. Sales were down 6.3% on a topline basis, unadjusted for different store numbers.

It said the drop was smaller when adjusted for sales disruptions at its Bourke Street store in Melbourne and in stores in Sydney and on the Gold Coast: the drop was down around 4.3%.

But the company surprised with this warning:

"The Company has planned for LFL Sales to be –7.5% for each of the next 3 quarters of FY09 (which is worse than was experienced in the 1990/91 recession).

"On this basis the Company reaffirms its guidance of 5-10% PAT growth in FY09.
"We have set our trading budgets for FY09 at worse than the experience of the department store sector in 1990/91, where the market experienced four negative quarters ranging from –3% to –6% per quarter.

"If conditions continue to deteriorate and trading continues below its budgeted LFL Sales level of –7.5%, then the Company will reconsider its FY09 PAT guidance.

"The Company has a strong Balance Sheet, low Debt levels, strong Cashflows, clean Inventory levels and an attractive Store portfolio – providing a strong foundation for the expected challenging environment over the upcoming months.

"The Company is well prepared to continue the David Jones tradition as the leading gift-giving destination throughout the important Christmas trading period & subsequent Clearance trading in 2Q09."

David Jones reported Tuesday that it was planning three news stories and would upgrade three others, but the benefits wouldn't appear until 2011-12, well after the current slump is over, hopefully.

It was a case of good news, then the bad news. What's left for the retailer's AGM on Friday?

Harvey Norman's sales have fallen in Australia by 1% to 5% since mid September (a bit of competition from JB Hi-Fi hasn't helped either).

Clive Peeters, another competitor in the same sector saw sales down in August and weak in September. Just Jeans and the rest of Just Group is weak, as is small fashion chains, Noni B and Specialty Fashion.

If we do get growth of 1.7% in 2009, then David Jones will be wrong.

If we get sales declines at David Jones above the level in the previous recession, then the retailer's gloom is justified.

So far retail sales in the September quarter were up just 0.1%, according to the ABS (but seemingly down 1% in the month of September).

September quarter sales figures from Westfield showed fairly solid growth, but slowing for the September quarter. The one exception was department stores, such as David Jones, which had negative growth of more than 2%.

That begs the question about how the now private equity owned Myer is travelling.

Its seems to be matching DJs and other retailers in weekly 'sales'.

Tough times all round.

DJ's shares eased 5c to $2.45. Investors reckon its all in the price...!


 

AIR publishes a weekly magazine. Subscriptions are free at http://www.aireview.com.au