Key points
- On the most recent retail trade figures for May, overall retail trade showed a 4.7% annual growth rate, well above the five-year average growth rate of 3.6%.
- The annual growth rate of online sales, at 9%, has slowed markedly from the peak level of 32% recorded in January 2011.
- Some stand-outs are Premier Investments, which is up 57% in total return in the past year; Beacon Lighting (up 91%); and Domino’s Pizza (up 84%).
The Australian retail sector definitely presents a mixed bag to investors. Australian retailers are facing headwinds, but are also gaining confidence from some positive changes.
On the plus side
Let’s look at the positives. On the most recent retail trade figures for May, overall retail trade showed a 4.7% annual growth rate, well above the five-year average growth rate of 3.6%, according to CommSec. The rise was driven by non-food retail spending, which was up 5.1% on a year ago (compared to a five-year average of 3.2%); and sales by chain-store retailers and other large retailers, which showed a 5.3% increase over the year, versus a five-year average of 4.4%.
While department stores continue to struggle, most specialty-store categories saw sales grow in the year to March 2015, according to retail landlord Novion (which became part of Federation Centres last month).
Interest rates remain at record lows. And retailers would have been buoyed by the June employment report, which showed a 7,300 rise in jobs after increasing by 39,000 (revised) in May. More importantly, full-time jobs rose by 24,500 in June and CommSec says 214,900 jobs have been created in the past year.
The lower A$ is helping retailers fight off the challenge from online retail sales. National Australia Bank estimates that Australians spent $17.1 billion on online retail in the 12 months to May 2015 – equivalent to 7% of spending at traditional bricks and mortar retailers – the annual growth rate of online sales, at 9%, has slowed markedly from the peak level of 32% recorded in January 2011.
Also, in just five years, the number of cashed-up Chinese and Hong Kong tourists coming to Australia has more than doubled.
Possible minuses
Against that, Australian consumer confidence is proving an erratic number. Last year, it was hit hard by the perceived harsh Federal Budget. Just when it seemed to be recovering, concerns about China’s stock market downturn and Greece’s debt turmoil combined this week to push the confidence figure to a seven-month low on the monthly Westpac/Melbourne Institute Index and a 12-month low on the weekly ANZ/Roy Morgan Index.
Not all of these positive trends are uniformly good for the nation’s retailers, and vice versa for the negatives. But it makes the sector one for stock-pickers.
While there are stand-out performers such as Premier Investments (owner of Smiggles, Peter Alexander, Just Jeans, Jay Jays, Portmans, Jacqui E and Dotti), which is up 57% in total return in the past year, Beacon Lighting (up 91%), and Domino’s Pizza (up 84%), there are also some major laggards, such as department store heavyweight Myer (down 41%), upmarket goods retailer OrotonGroup (down 55%) and even the sector giant Woolworths (down 19%).
On analysts’ consensus target price, there is a clear division in how the market sees the retailers:
Upside Flyers
Super Retail (SUL): 7.6% upside to target price
OrotonGroup (ORL): 31.1% upside to target price
Kathmandu (KMD): 10.3% upside to target price
Flight Centre (FLT): 14.6% upside to target price
Dick Smith (DSH): 13.5% upside to target price
Myer (MYR): 6.8% upside to target price
Billabong (BBG): 23.7% upside to target price
Metcash (MTS): 13.6% upside to target price
Downside Divers
Beacon Lighting (BLX): 5.5% downside to target price
Premier Investments (PMV): 12.9% downside to target price
Woolworths (WOW): 7.2% downside to target price
JB Hi-Fi (JBH): 8.6% downside to target price
The Reject Shop (TRS): 8.9% downside to target price
Domino’s Pizza (DMP): 12.1% downside to target price
Fair value
Harvey Norman (HVN): 3.4% downside to target price
Wesfarmers (WES): 0.1% upside to target price
Takeover potential
But there is one factor that could suddenly change these views – a takeover bid.
On the last day of June, New Zealand retailer Briscoe Group – a homewares retailer and the operator of the Rebel Sport franchise in New Zealand – lobbed an unexpected takeover bid for adventure gear retailer Kathmandu.
Kathmandu shares surged 26% on the bid to $1.53, just short of the value at the time of the part-scrip, part-cash bid, which equated to $1.55. But when the market looked closer at the offer, the shares fell back to $1.43, and have since recovered to $1.53. Analysts at New Zealand broking firm Forsyth Barr reckon that Briscoe would have to offer about $1.93 a share to induce KMD shareholders to sell out. That would be great news for Kathmandu shareholders, who have watched their stock tumble from $3.68 a year ago to as low as $1.15 last month.
Of the other major retail stocks, Myer, OrotonGroup and Woolworths are also seen as possible takeover candidates.
Two parties have been named as potential bidders for Myer: retail magnate, chairman of Premier Investments and former chairman of Coles Myer, Solomon Lew, and Australian private equity firm Archer Capital, which would probably need co-investors to make a serious bid for Myer.
Myer shareholders would love to see some of the Kathmandu effect put into their share price. The department store icon famously has never traded above the $4.10 at which it was floated in November 2009, and is now, at $1.26, almost 70% down on that float price, and just off a record low.
Upmarket retailer OrotonGroup is another stock that has fallen badly from grace on the stock market, and could use some takeover action. From $9.25 in 2011, Oroton has slid dramatically to $1.935. Broker UBS says OrotonGroup is a potentially attractive target for overseas luxury companies.
Reports have also emerged in the media that US private equity giant Kohlberg Kravis Roberts (KKR) has a bid prepared for Woolworths. At $34.1 billion, Woolworths would be a big bite for any potential acquirer – but Woolies is a lot cheaper than it used to be. WOW has been hammered on the stock market over the past year, and is down 28% since April 2014. Woolies has been consistently beaten on sales growth by its Wesfarmers-owned arch-rival Coles, and under growing pressure from foreign competitors, such as Aldi and Costco, that have moved into Australia. The company’s hardware joint venture, Masters, has been soundly beaten by Wesfarmers’ Bunnings operation, and there has been a series of write-downs and weak sales results.
Although such an approach would be one of the biggest deals in Australian corporate history, the falling US$/A$ exchange rate and cost of capital are favourable for a US-based acquirer. KKR is a very big private equity player, but even it would probably need to bring in other partners.
None of the other retailers has been mentioned in recent speculation as a potential takeover candidate – but remember that in theory, any company trading on the stock exchange is a potential takeover target, at any time.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.