Rose-tinted retail-land - is it overcooked?

By NZPA

Friday 14th March 2003

New Zealand retailers are ringing up profits that would make their offshore counterparts weep.

But has the market peaked and will a possible United States-led war with Iraq see New Zealanders reach for the savings book, rather than the credit card?

Statistics New Zealand (SNZ) figures this week showed consumers spent $4.3 billion in January, up 1.1 percent on December.

That was almost three times the pace expected by economists. For the year to January sales rose 7.9 percent.

In contrast, British retail sales grew last month at the slowest pace since September 1999 as Britons' worries about a war in Iraq and the slowing economy dented confidence.

UK sales in stores open more than a year rose 1.3 percent in February from a year ago, down from 4.1 percent the previous month .

Consumers, whose spending makes up about two-thirds of Europe's second-largest economy, kept Britain out of recession last year. Now growth in service industries is slowing and consumer confidence has worsened.

Retail sales here are underpinned by strong performances among the top retailers.

Discount giant The Warehouse, the country's biggest listed retailer, on Tuesday announced its January half year profit rose 7.2 percent to $63.5 million before a $7.5 million one-off charge lowered the bottom line to $58.2 million.

While the double digit growth of past years has evaporated, the result was in line with expectations and investors approved, lifting The Warehouse's shares to a high of $5.80 on Friday, from $5.49 on Tuesday.

The company said slow Christmas sales which hit the January bottom line may be an aberration, with February sales up 7.2 percent in core operations and same store sales up 6.3 percent.

Meanwhile, US-based Wal-Mart Stores Inc, the world's biggest retailer, was chilled by poor weather in February, posting a 2.6 percent rise in same-store sales -- at the lower end of forecasts which called for a 2 percent to 4 percent increase.

With figures like these you'd expect to see offshore investors queuing for a slice of New Zealand retail action. But the reality is not so.

Australian retail conglomerate Foodland -- owner of the Foodtown, Countdown and Woolworths supermarkets -- this week kick-started a "strategic review" of its Farmers department store chain after ditching its cut price cousin Deka last year.

That's despite Farmers reporting a 24 percent increase in first half profit to $A23.8 million ($NZ26.14 million) on Thursday, on sales of $A342 million ($A302 million in 2001).

This week's SNZ data showed department store sales were a top performer in January, with sales up 9.9 percent.

Foodland managing director Trevor Coates said it was reviewing the Farmers holding -- its only non-food business -- after two major purchases in the past 20 months; its $A600 million purchase of Woolworths NZ in June last year; and its $A166 million purchase of 40 Australian supermarkets from Franklins in July 2001.

"It may well be that divesting Farmers will provide a clearer focus and direction for both Foodland and Farmers to the advantage to all stakeholders," Mr Coates said.

Analysts said the move was not unexpected.

"The market looks at Woolworths Ltd as a pure food play and I think any move by Foodland to go that way should be well received," DJ Carmichael industrial analyst Justin Stewart said.

The big unknown is how the sale will affect the group's balance sheet.

"Can Foodland exit the business without doing any damage, will they make a profit or will they record a loss to book value?"

The Farmers business includes Retail Financial Services -- the country's largest non-bank consumer finance business with assets exceeding $300 million.

Farmers has undergone a revamp of image, a management shake-up, and a return to profitability under chief executive Nick Lowe, who has headed the company since 2001.

Mr Lowe wasn't commenting on whether he may lead a management buyout of the company and said it will be "business as usual" while the review takes place.

Industry insiders suggest listed retailer Pacific Retail Group is the local business most likely to be interested in Farmers.

PRG chief executive Peter Halkett declined to comment . But its shares dropped sharply, down 15c to $2.20, on light volume on Friday against a broader market rally.

One broker said the PRG share register was tight, with Eric Watson's Logan Corp owning about 73 percent, meaning it wouldn't have the shareholder spread to support the purchase unless it was initiated by Logan.

The Warehouse chief executive Greg Muir said his company was not interested, "and in any event, unless we were just taking it for the (store) sites, I think the Commerce Commission would have concerns about (us) owning that business".

The red shed retailer is keen to expand its own empire, with plans to add a further 105,000sq m of floor space -- taking the total to 450,000sq m -- by the 2005-06 financial year.

Briscoe Group managing director Rod Duke said the company -- which is also eager for expansion -- "would look at anything", but added that it was "way too early to say whether or not we would have any interest".

The effervescent local retail market is supported by strong labour figures -- in a year when the jobless rate fell to a 15-year-low of 4.9 percent -- strong net migration, and spiralling house prices.

But economists warn the underlying message in this week's figures is declining sales in the core retailing group, which excludes motor vehicle sales and services.

That group expanded just 0.2 percent in January.

"If you take the cars out, it's a fairly soft underlying picture," Deutsche Bank AG chief economist Ulf Schoefisch said.

"On the one hand people are confident enough to buy cars, but on the other hand it suggests that the underlying picture of spending is weakening."

Bank of New Zealand chief economist Tony Alexander said the monthly retail data was notoriously volatile -- with a 3 percent margin for error on the 1.1 percent figure.

"In other words, the result could easily be a lot stronger or a lot weaker than the actual estimate."

The big increase in car sales, often seen as a positive signal about consumer confidence, may be more closely linked to strong migration, he said.

"Everyone needs wheels, especially in Auckland."

Economists are unsure how sales will hold up. A war will mean higher petrol prices, driving up transport costs and reducing consumers' freedom to spend.

The Institute of Economic Research this week forecast domestic spending will remain strong this year but will start to reflect lower export returns next year.

It said economic growth for the year to March will be stronger than it last forecast at 4.3 percent but will steeply drop off over the next two years, to 2.7 percent and 1.9 percent.

The forecasts didn't include any possible effects of war -- "although the impacts of actions to date are included" -- because the timing, size and direction of an Iraqi war are very difficult to predict.

From an investment point of view, ABN Amro Craigs retail equities adviser Nigel Scott said brokers weren't recommending retail stocks at the moment as the threat of war looms.

"Most people are almost totally inactive, waiting for the fighting.

"The whole market has ground to a halt, not just retail."

The next few weeks may be a turning point for New Zealand, as the world balances on the precipice of war.

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