Sector Sentiment
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.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Chris B
:
Hi Andrew,
I think the reason we are getting more overseas retailers coming to Australia is because there is lower growth over in Europe, they are looking for better growth than Europe. More importantly, they want to get into Asia and if they want to get into Asia, they need to get a foot into Australia too.
And rents are going down, and that has been a catalyst.
As well as that, retailers have had it too good in Australia for too long. I remember in the 80’s they had Sportsgirl, Katies and Susan’s as major women’s retailers. We had a lack of choice for buying things, and that had been going on even past 2000. Now finally, we are starting to get competition. But we are still stuck with old habits, multi-nationals charging much more in Australia than in other countries due to the previous lack of competition with a small population and big country making it more expensive for distribution ie less economies of scale.
I am thinking about Oroton, the price has dropped and the products are very good. I’m not sure about the new management but there is new competition from Europe eg Coach.
Carlos H
:
Hi Roger. Thanks for your response.
In fact, I made a typo. Instead of JB, I meant The Reject Shop.
Using as much as possible the Value.Able methods, I estimated its value at around 15-16.
I used data from those free online sites. So I could not find some of the information that is needed, if one wants to follow your methods more strictly. Therefore, there is some “guesstimation”. But I wanted to know if (as you cleverly put it) I am approximately right, and not exactly wrong. Just as part of this exercise of learning your method, as a newcomer to the investing world.
Indeed, data from those websites shows ROE (for the Reject shop) to be 20.10%, much lower than JB’s ROE (shown as 54.46%) if those sites are to be trusted.
Carlos H
:
Hi Ben, thanks for the report. Very interesting.
I am just getting accustomed to the Value.Able methods.
Regarding JB Hi-Fi, I have been following this company and trying the valuation method, just to see how it works.
Although I did not have access to all the information that should be used, I estimated JB´s intrinsic value to be around 15-16.
Now that you have commented on it, and for the sake of comparison, what has your valuation been? DId I get it right?
In any case, thanks for your articles and comments
Carlos
Roger Montgomery
:
Hi Carlos, Ours is higher and that will be because of differences in many of the inputs.
Andrew Legget
:
Hi Carlos,
I think you are pretty accustomed to the methods by the sounds of it. I ran my old approach in valuation using the method in Rogers book and i got a figure basically in line with yours ($15.01).
I luckily had a history of JBH results in front of me as i am in the process of valuing it in a bit more detail and a different kind of model so thought i might just use it for a quick value.able valuation for you.
Remember that there is no such thing as getting it right in valuation, in a way we are all certain to get it wrong. At least one input will differ whichever way you approach it. But I tink you would be in a reasonable conservative ball park based on current information and thats not a bad place to be.
Carlos H
:
Hi Andrew.
Thank you very much of your comments.
I see your point, and it has been great help. As you mention, it is about being “about right”, depending on techniques used. But it is rewarding to me (as I am taking my first few steps using Roger´s method, although with some missing data) to see that I was able not to be off the mark.
Cheers and have a nice weekend
Andrew Legget
:
I think the whole macro thing with retail has been a bit overblown. There has been a change, maybe we can call it an “evolution” in certain areas and those that can adpat were and will continue to do well and those that don’t will fall behind.
Evolving to meet the lastest situation in retailling will lead to some internal factors which will need to be considered. I agree that those that do a good job taking care of these will come out well and the previous depressed prices could provide a good buying opportunity.
One things is for sure, those involved in the clothing segment of retail will continue to see some heavy hitting competition come in and they will need to be ready on how to do with it. The Swedes are about to join the Spaniards and British in at least in Sydney. Australia appears to be an area where worldwide brands are looking to get a foothold in, probably due to our links with Asia and an economy going reasonably well on a comparative basis.
The DJS and MYR merger is obviously hogging the limelight, my two cents is that a merger could work, but the two becoming one is not going to change the need for them to think about strategic decisions they apepar to have been putting off as sepeerate entities.
I am still not sure how it can be decided that a merger proposal from a rival backed by one of the best known investment banks can be decided not to be material enough to disclose. Perhaps DJS were spooked by the faux-offer they received a couple of years ago. I get the zero-premium arguement but it appears they just ended it rather than encouraging further talks.