Retailers at the crossroads

The impression among many investors is that retailers will be the victims of the toughening of monetary policy by the Fed and possibly in other countries where central banks are pushing up rates – such as Australia, the UK and NZ.

Rising inflation, higher oil, petrol and other fuel costs will end up as greater problems than the rise in interest rates from the record lows and the ending of the huge quantitative easing programs by central banks (but not in Japan).

These are all messages we will hear from Australian retailers when they report their June 30 financial year figures in August. There should be the usual spate of updates starting towards the end of this month.

The surge in petrol prices is certainly having an impact, as economists at Moody’s noted in a Friday note “Nominal (US) consumer spending on gasoline has increased $91 billion at an annualised rate since the beginning of the year. Some consumers have dipped into savings because of higher prices at the pump.”

 “Despite the concerns about consumers they’re not slowing down. Using payment card transactions data from the (US) Bureau of Economic Analysis, weekly consumer spending isn’t showing any significant deceleration.”

Inflation and rate rise fears are more advanced in the US because the Fed started its rate rises before the Reserve Bank did and the US inflation rate is well ahead of Australia’s at more than 8% compared to our 5.1%.

But fears are emerging here as Wesfarmers CEO, Rob Scott said at his company’s investor day briefing on Thursday that while shopping behaviour by consumers is not yet changed, concerns around future higher interest rates and inflation are creeping up.

Wesfarmers controls two major mid-range department store chains – Kmart and Target, as well as the Bunnings hardware chain which remains the engine for the group.

Judging by his comments, the rattling US retailers went through in May in the wake of very mixed quarterly results, has yet to hit here although there are some analysts and business media who merely extrapolate events in the US to Australia.

After the weak reports last month from US retailers like of Walmart, Target, Kohl’s, Gap and Abercrombie & Fitch investors got very worried about future share price growth for retailers generally and the sector was sold down very quickly.

But a week later and another group of US retailers triggered a rethinking of the outlook.

A couple of department store giants and a couple of cheap as chips chains produced better than expected figures for the first quarter and lifted their forecasts for the rest of the year.

The cheap retailers like Dollar Tree and Dollar General produced solid revenue, profits and outlooks, a bit like the larger TJX Companies group did in mid-May.

But the big surprise was the stronger figures from department store giant Macy’s and its smaller rival Nordstrom.

Both have struggled for most of the past couple of years lacking growth and rising costs. Sales and promotions have been considered weak as Walmart, Target and Amazon seemingly swept all before them in the pandemic and the coming out of lockdowns and greater freedoms.

But both chains seem to have gained a new lease of life in the first quarter that missed Target and Walmart.

Dollar Tree saw a 29% one day price gain with better-than-expected returns and outlook and its rival at the bottom end of retailing, Dollar General saw its shares rise 21% in a day for the same reason.

Macy’s, which also owns Bloomingdale’s, reaffirmed its fiscal 2022 sales outlook and raised its profit guidance, expecting stronger credit card revenue for the remainder of the year.

First-quarter (ending April 30) profits and sales were ahead of market expectations, as more shoppers returned to malls to shop in spite of decades-high inflation that has hit rivals like Target, Walmart and Kohl’s.

They all reported results that fell short of market expectations and saw share prices slide more than 11% to nearly 30% on the first day and remain weak.

Investors and analysts didn’t like higher inventory costs (both Target and Walmart said they lifted stocks to ensure a minimum of out of stocks on their shelves and disappointing customers).

(Wesfarmers made the same point in its investor day presentation which revealed a rise in inventories which would take a while to come back to ’normal’ levels.)

But Macy’s shares surged 29% for the week they reported as the chain – which the pandemic laid low in 2020 – continues to rebound.

Macy’s improvement followed a similar report from smaller department store rival, Nordstrom (which is more upmarket than Macy’s itself). It reported better than expected figures and saw its shares jump 25% in a day.

For the three-months ended April 30, Macy’s reported net income of $US286 million, nearly three times the weak $US103 million reported for the same quarter in 2021.

Macy’s said revenue grew nearly 14% to $US5.35 billion from $US4.71 billion in the same quarter of 2021.

Nordstrom sales jumped more than 18% for the quarter and guidance for the rest of the year was raised. Sales at Nordstrom’s branded stores leapt more than 23% and sales from its discount chain, Rack were up 10.3%. Sales are now forecast to be up 6% to 8% for the year.

Macy’s also cited something Target and Walmart can’t benefit from – the return of international tourism to New York (Nordstrom said its flagship store in that city had its best quarter since being re-opened several years ago).

The company said the higher tourist numbers drove traffic at Macy’s department store locations in bigger cities, including New York. There was a noticeable rise in tourism from Central and South America, as well as Europe.

Macy’s reported inventory levels as of April 30 that were up 17% from the prior year but are down 10% compared with 2019 levels – which seems to have satisfied analysts.

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So why the improvement for retailers that were seen as being ‘past it’ a year or so ago or on retailing’s ‘death row’ because they were out of date?

US analysts in the market and in retailing point to a couple of factors – the first being the end of the lockdowns (and despite continuing cases of Covid in much of the US) consumers have returned to bricks and mortar stores for the experience (to be out of homes and restricted living), they are rediscovering choice – their choice, not the restricted offerings from the likes of Amazon, and they like being able to price and compare (while using the internet) and are finding the big chains are competitive.

This may be a temporary factor, but analysts say many consumers report they are sick of ordering online, combine their visits to malls and shops with something else – such as meeting friends, dining out. Consumers still have (as they do here in Australia) high levels of savings, but like in Australia they are starting to run them down.

In these inflationary times, consumers also report that they can go to malls and other shops and look for cheaper versions of products they want – but higher petrol and transport costs are starting to limit that option.

Ordering clothing and footwear on line has proved to be irksome with many anecdotal reports of consumers ordering clothing and shoes in several sizes, finding the right fit and returning them which has added to the costs of many retailers and Amazon.

After years of losing or cutting back stores and their product ranges, there are There are also signs (small, admittedly) of new brick and mortar store openings. Academy Sports & Outdoors is opening 8 stores this year, Dillard’s has replaced of its old stores with new units, Macy’s will open several new locations this year, and Kohl’s is updating 400 stores when it adds Sephora to their assortment.

The Wall Street Journal says that US restaurant and bar sales are 55% higher this year than in January 2018.

Certainly online success stories in the lockdowns like Peloton and Under Armour are now among the retail disasters. Amazon’s rapid expansion of its warehouses and other facilities has cost it $US2 billion and the company has confirmed that it is now subleasing 10 million square feet in key markets like New York, New Jersey and California.

Amazon’s eCommerce sales were down 3% year on year in the first quarter for the world’s biggest e-tailer. Amazon’s sales growth in the March quarter were the slowest for more than 20 years (since the net and tech collapse in 2001).

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And on Thursday more evidence that US retailing is still healthy, despite the messages seen in the weak Walmart and Target reports. Costco, the US big box membership only chain (and the 5th biggest retailer in the world with 830 outlets) revealed very solid sales for May.

The company said in a statement that sales jumped 16.9% to $US18.23 billion for the four weeks to May 29 and 15.5% for the 39 weeks to May 9 to a record $US165.56 billion.

In April, Costco reported sales of $US17.33 billion, up 13.9% from a year-ago.

Total company same-store sales for May rose 15.5% and e-commerce sales increased 6.3%. Same-store sales excluding impacts from changes in petrol prices (Costco is a big petrol retailer) and foreign exchange rose 11.8% and e-commerce sales were up 7.7%.

No sign of any consumer reluctance in that data – Costco operates 13 outlets in Australia which is more than either France, China or Spain. No sales figures were released from Australia but international sales (which include Australia, Spain, China, France, Taiwan, Iceland and the UK) saw a 10.1% rise in comparable (excluding petrol and currency) store sales in May which was slightly faster than the 9.6% rise in the 39 weeks to May 29.

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So does all this mean anything for Australian retailers?

Well retail sales remain strong – rising 0.9% in April to be up 9.2% from a year earlier. The most surprising result in retailing from the first quarter was the solid and much better first half performance by embattled Myer which saw sales rise 8.5% to more than $A1.5 billion. A lot of that growth was due to online sales, but that was in the Covid Omicron lockdowns of late 2021 and early 2022.

But Australian consumers still have high savings, as the March quarter national accounts confirm, even if the savings ratio fell to 11.4% in the quarter from 13.4% in the final quarter of 2021. The GDP report also showed household spending remained solid in the quarter with spending on discretionary items rising more than 4% in the period.

Inflation remains the biggest obstacle here and in the US. Interest rates will continue to rise but the real dangers to consumer spending are the still high levels of petrol costs (even after the temporary 22 cents a litre cut in excise) and now the rapid rise in gas and electricity costs which are already causing problems for corporates (and power companies such as origin Energy and AGL).

Discretionary spending will feel any pain first. The rises in energy costs have yet to hit consumers and when they do the impact could change a lot of thinking about stocks like JB Hi Fi, Harvey Norman, Premier Investments, Temple & Webster, Nick Scali, and Kogan (which is hurting from being overstocked for a second year).