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Retail Sector – Stock pile

Target’s earnings warning issued by Wesfarmers last week was a timely reminder that retailers are permanently playing a game of getting their inventory levels just right.

The late arrival of winter was cited by Target for the excess winter inventory forcing the embattled discretionary retailer to heavily discount and promote its stock.

The outcome was a heavy hit to Target’s expected operating income for FY13. WES pulled guidance down to $140-160m EBIT for the year compared to $244m last year.

Target has been a problem area for WES for some years as its market position comes under increasing pressure from Myer and the plethora of standalone retail brands that have crowded the apparel market in recent years.

Despite a few attempts to freshen up the style and range under successive leaders, Target has struggled to stand out from the crowd and is giving its parent company a headache over the right formula.

Wesfarmers will argue that Target’s lower earnings are one-off in nature but apparel retailers are always subject to this type of outcome when consumers don’t spend for whatever reason – weather, fashion changes, lack of confidence, wage changes, interest rate changes and so on.

The Target announcement has obvious ramifications for other fashion apparel retailers, especially the department stores Myer and David Jones.

But the recent evidence of improving same store sales growth at MYR and DJS suggests both companies have benefitted from less discounting and fewer promotional events resulting in more satisfactory inventory management. Gross profit margin at both companies increased at the recent half-year profit announcements while inventory metrics also looked good.

Myer

Department store Myer reported its 3rd quarter sales had lifted 0.5% to $652.5m with same store sales growth of 0.4%.

Although the growth in sales is modest, it is nonetheless the fourth consecutive quarter of growth.

Despite this, Myer boss Bernie Brookes was staunchly cautious about the outlook for retail trading.

Why?

We only had to look at the Westpac-Melbourne Institute consumer confidence survey released the same day which showed consumers have gone further into their shell with a 7% decline in the index to 97.6.

That’s a terrible number and directly reflected the uncertainty consumers have with regard to the state of the Australian economy. The survey was conducted immediately after the Federal Budget so even though the Reserve Bank has made further interest rate cuts, fully passed on to mortgage holders by the retail banks, spending habits are unlikely to budge from hibernation any time soon.

Myer continues to execute its business strategy very well but it will only carry the company so far until sales growth picks up with more gusto.

Expect other retail companies to mirror Myer’s subdued commentary.

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