Consumers' penny pinching picked to hit retailers' results

By Peter V O'Brien

Friday 22nd September 2000

Good profit increases in listed retailers' latest results could slow down as economic difficulties affect consumer spending.

The "profit change latest period" column in the table includes two companies - Arthur Barnett and Hallenstein Glasson - whose figures are six months out of date, because they were the first half ended February 1.

Full-year results will be available within the next few weeks.

Constant increases in the price of petrol should be eating into consumer discretionary spending, although some people might cut back on the use of their motor vehicles.

It is also likely relentless downward pressure on the New Zealand dollar will lead to price increases for imported retail goods.

The sector is very competitive. Traders have absorbed increased costs for some time in the face of the competition but there is a limit to that strategy when margins are cut to the limit.

Effects on companies in the sector differ depending on the countries of origin of their imported goods and the currencies in which they are sold.

Much has been made of the currency's decline against the US dollar. It fell 15% in the six months from March 22 but was down only 5.42% against the Australian dollar in the same period.

The trade-weighted index (TWI) was 53.74 on March 22 and 48.54 on last Monday, a fall of 9.67%.

A basket of currencies in the TWI is weighted according to New Zealand's trading patterns and is probably a better reflection of what has happened overseas to the New Zealand dollar than concentrating solely on the relationship with the US dollar.

That point does not overcome the problem with oil prices, which are based on the US dollar.

A combination of rising actual prices and the decline in the currency has had a double effect on petrol prices at the pump, apart from any impact emanating from percentage, as opposed to dollars and cents, markups through the local distribution system and the influence of the tax system.

The situation gets more complicated when one takes account of the facts that retailers have transport costs and consumers could cut back store spending to cover higher motor vehicle-running costs.

Retailers have taken a cautious approach in their preliminary reports when considering future trading prospects.

Restaurant Brands, for example, said in the report for the six months ended June 30 it expected the full year's profit to be marginally ahead of last year, assuming New Zealand continued to experience tight retail trading conditions during the six months to December.

The company released its third-quarter sales figures 10 days ago and said a 7.4% increase in total sales for the period was pleasing given the tighter economic environment and the most recent drop in the takeaway sales sector.

Total takeaway sales in June and July fell 1.7% compared to the same months last year.

Takeaway sales are a good barometer of what people do with their discretionary spending but the retail sector covers a lot more than food.

At the high-price end of the market ("big ticket" items), appliance retailer Pacific Retail Group said a solid profit improvement for the year ended March 31 demonstrated its ability to achieve sustainable growth in operating revenue and "deliver it smoothly through to the bottom line."

The current economic climate "tempered the group's expectations going forward."

Clothing retailer Hallenstein Glasson expressed similar sentiments in its report for the six months ended February 1, saying it remained cautiously optimistic for the (then) balance of the winter 2000 season "in spite of some uncertainty generated by the current political environment."

Group sales for the first two months of winter 2000 were 4.8% ahead of the same period in 1999.

It will be interesting to see whether that progress was maintained, because, apart from the impact of the currency, oil prices and general economic conditions, the country had a remarkably mild winter, subject to occasional short freezes.

Hallenstein Glasson thought the chain's provincial stores could also benefit from the better season experienced in some sectors of the farming industry.

The Warehouse Group is the big one among listed retailers and performed accordingly in terms of profit growth and share price gains. The company sources a considerable amount of product from overseas and could soon feel pressure from the lower currency, subject to whatever hedging arrangements it has in place.

Share prices in the table show a reasonable situation, when compared with the lows for this year, but on Monday they were all well below last year's highs, with the exception of The Warehouse.

Retail companies' share price performance

Company	Price (c) 18.9.00	2000 High (c)	2000 low (c)	% change on low	Profit change latest period
A Barnett	100	108	77	+29.9	+41.0 ¹
Hallenstein	226	242	175	+29.1	+6.4¹
Michael Hill	300	340	265	+13.2	+13.3
Pacific Retail	150	200	140	+7.1	N/A ²
Restaurant Brands	106	157	100	+6.0	+5.4
The Warehouse	595	635	387	+53.7	+29.6

¹ Interim; final due soon
² Loss last year; $7.7 million profit year ended June 30, 2000

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