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Retailers watch as their share prices slip from boomtime

By Peter V O'Brien

Friday 24th March 2000

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Listed retailers' share price growth has slowed down after substantial gains last year.

When The National Business Review examined the sector on September 24 price gains from the 1998/99 lows ranged from 33.3% for Arthur Barnett to 201% for supermarket operator Progressive Enterprises, the latter now absorbed into Australian retailer Foodland Associated.

Other gains recorded in last year's examination were 85% for Hallenstein Glasson, 105.4% for Michael Hill International, 166.6% for Pacific Retail, 110.9% for Restaurant Brands and 141.9% for The Warehouse Group.

Those movements followed large profit gains in the then latest reporting periods.

The profit changes shown in the table were also much lower than in September but that was understandable, given the September figures were struck from a low base when the economy was in an earlier recessionary phase.

Listed retailers' profit performances are a useful guide to overall economic health for two reasons: they reflect consumer spending patterns, which in turn are expressions of consumer confidence, and the Stock Exchange's retail sector covers a broad range of consumer-oriented activities from food (Restaurant Brands), through jewellery (Michael Hill) to clothing (Hallenstein Glasson) and the "we sell everything" business of The Warehouse Group.

The last company's result was a feature of the latest reporting round when sales and profit surged both totally and on a same store basis.

Part of the improvement may have been a result of people spending in advance of fears about the Y2K bug's potential problems, a point noted when Government Statistician Len Cook released retail sales figures for January which revealed a dip in sales compared with the previous period.

The effect of the Y2K bug and so-called end-of-the millennium spending on the future of retail sales will remain speculative and theoretical until figures for the full March quarter are available.

Short-term volatility, as shown in comparisons between December and January, does not necessarily mean the volatility will be long term.

Other factors, such as movements in the dollar's value against other currencies, affect the value of retail sales. A fall in the dollar lifts import prices, leading eventually to price rises for consumers if retailers are to preserve margins.

The Warehouse addressed the question of margins in its report for the six months ended January 31. Operating earnings before interest, abnormal items and tax were $75.2 million, an increase of 28.5% over the corresponding period of the previous year, and the group operating margin went from 11.3% to 12.5%.

The company said the improvement in margins was "driven by the operating leverage from high sales and improvements in the gross margin net of distribution costs."

"Operating leverage from higher sales" means a retailer can improve its margin if it sells more, but keeps the internal cost of sales (after product cost) at, or near, the same dollar amount as in the relevant previous period.

If the same staff sell more product per member and other administrative costs remain the same, the margin should rise.

Margins in retailing vary according to the product. A supermarket operation, for example, works on comparatively low margins, because there is a high stock turnover a year and competition ensures margins are kept tight relative to the need to earn an appropriate profit.

A specialist in "high ticket" items may need a much higher margin than a supermarket, due to lower stock turn. Top-price jewellers and furniture retailers are examples.

The jewellery situation focuses attention on Michael Hill International which has specialised in high-volume sales in what could fairly be called a middle-of-the-road market.

There was a day when expensive jewellers operated one or two stores and relied on comparatively big spending on low stock turnover to take care of profit.

Michael Hill took a different approach, which resulted in the company having 40 stores in New Zealand and 67 in Australia at December 31, with more to come.

It seems standardisation of outlets, much of the product range, its presentation and staffing (the latter probably varying depending on customer and potential customer levels) allowed the company its rapid expansion.

Investors should remember the differences in products among retailers, cost controls, regional locations and any pressure on margins when selecting any retail company's shares.

They should also be aware of weather patterns, particularly if the company sells apparel.

That was emphasised at last year's annual meeting of Hallenstein Glasson. Shareholders were told the 1999 winter season was disappointing with group profit down 10% on the previous winter. The 1999 winter was unseasonably warm but the company also said its Hallenstein chain had an "inappropriate market positioning" during the early part of the winter season, which reflected a very young fashion position and lacked some commercial appeal to the broader, more traditional customer base.

There is a lot more to retailing than opening a store, buying product and hoping to sell it.

That point is something the various internet retail groups may need to watch if they seek listing but at least they do not have to worry about the appropriate number and location of storefronts.

Retail companies' share price performance

CompanyPrice (c)1999/001999/00% changeProfit change
17.3.00high (c)low (c)on lowlatest period%
A Barnett9013290NILN/A 1, 2
Hallenstein203290185+9.7+4.9 1
M Hill298350260+14.6+14.9
Pacific Retail171225171NIL+37.4 3
The Warehouse 875 4900595+51.3+30.3

(1) Latest full year; interim due soon
(2) Profit 1999 of $416,000 compares with loss of $2.25 in 1998
(3) Half-year result adjusted for removal of unusuals. Third = quarter result, pre-tax, now available
(4) Prices cum 1:1 bonus

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