The light at the end of the tunnel?

omnichannelretail“The toughest I’ve ever seen it”, was how Specialty Fashion Group CEO Gary Perlstein described the state of retail to Inside Retail at the half-year.

He’s now revised that view, but not positively. Last week, Perlstein joined the list of publicly-listed retailers to be burned by the market following full year results, with investors clearly unimpressed over declining comparable sales at staple brands Katies, Millers, Autograph and Crossroads, as well as a cooling off acquisition prospects from Qatar-based firm Al Alifa Group.

Perlstein calls the state-of-play the “new world order” of Australian retail, a reality where traders are stuck between the rock of discounting, and the hard place of protecting margin, often at the expense of sales volume.

There are a few other characteristics dominating this new state of play, which appears to have embroiled the majority of Australia’s small-cap retailers, from a worsening consumer backdrop to ever-deepening investment in omnichannel as a path back to black for struggling businesses.

Perlstein, who has booked a two per cent decline in group comparable sales, believes SFG’s portfolio of mature brands, which account for the majority of the Group’s business, can be righted on the same base principles that saw Rivers return to black in FY17 – but he’s facing an uphill battle.

The first weeks of FY18 trading leading into the crucial November-December trading period have been less than encouraging for the first-half prospects of many Aussie fashion players.

Billabong International’s CEO Neil Fiske sought to manage expectations about what the Element, Von Zipper and Billabong brand owner could achieve Down Under in FY18, telling Inside Retail that he’s hunkering down to “ride out the storm”, after local sales declined five per cent in FY17.

RCG chief Hilton Brett is slightly more upbeat, telling IRW that the footwear specialist is “better placed than most”, to deal with the Australian market in the coming year, including Amazon’s initial impact.

RCG booked a 2.6 per cent decline in net profit for the year ended 30 June on impairments associated with Hype DC, with a sales slide from own brands and stagnation at The Athlete’s Foot crimping a positive result from Skechers and Platypus.

Brett says that August trading had been aggressive: “[Competitors] have certainly done some quite aggressive discounting over the last week in some of our [categories]…ultimately competitors have to make a decision about whether they’re going to run their business for the long-term benefits of shareholders or short-term.”

The common thread is that while some of the largest retail brands in Australia all recognise the unsustainability of discounting, it continues, and if the testimony of the aforementioned leaders is to be believed, it has worsened after what was considered to be an unprecedented June clearance period.

Should the trend continue, then the upcoming Christmas trading period will place another layer of pressure on already strained businesses, putting first-half trading – the heart of full-year earnings growth in the fashion segment – in jeopardy.

There are thus, perhaps unsurprisingly, lingering questions about whether surfwear specialist Surfstitch will be the only high-profile apparel wipe-out of FY18, with some calling for a proactive approach to brand management.

Shaun Weick, a small cap equity analyst for Macquarie, believes Super Retail Group’s recent decision to merge Amart Sports into Rebel to generate a market offer is indicative of what’s to come.

“Brand consolidation is definitely a factor they were likely to see going forward, particularly as Amazon and the online retail environment in general continues to evolve,” he says.

Perennial value’s director of small cap stocks, Grant Oshry, reckons the brand turnaround story often touted by retail CEOs needs to start materialising, arguing that the likes of SFG should consider cutting the fat.

“If you asked me today what I think the future is for SFG, Rivers [and City Chic] will be around, but Autograph and Crossroads? Not so sure,” he said.

“If you had to bundle the mature brands together, Millers probably has the best lease on life and opportunity… If they try and do all four at the same time, that’s a failed approach. They need to focus their efforts.”

Queensland of University of Technology associate professor Gary Mortimer believes mid-sized private brands such as Roger David are at most risk of succumbing to the current promotional environment, particularly as Retail Apparel Group looks set to reposition itself after being acquired by South African retail giant The Foschini Group, which is also looking to bring its stable of brands Down Under.

Omnichannel moves from buzz to capx

In response to mounting competitive pressures, the likes of SFG, Billabong and RCG all plan to spend FY18 pouring resources into omnichannel initiatives designed to future proof their businesses against Amazon and better generate returns in the new low margin environment.

RCG will launch endless aisles, click-and-collect and click-and-dispatch (which will involve three-hour store fulfilled delivery) through its 430-store network in FY18, part of a medium-term strategy to move online from five per cent of total sales to 15.

SFG has hit double digits, booking online sales at 10.4 per cent of total transactions, with a roll-out of click and collect during FY17 underpinning Perlstein’s ambition to make that figure as high as 20-30 per cent.

Online represents only 1.5 per cent of Billabong International’s total Australian sales currently, but that figure is set to soar in FY18, with omnichannel investment set to ramp up after a $11.7 million impairment on its omnichannel strategy in July.

An additional $10-20 million is set to be invested over the next two years globally, with an aspirational target of 10-15 per cent of total Australian sales coming through digitally.

Euromonitor’s senior industry analyst Bettina Kurnik says the step-up in investment is “encouraging” for established brands, saying that customers will likely remember the enhanced offer after the hype around Amazon dies down.

“Retailers have realised that it’s not a case of upping their game when Amazon arrives. It’s about investing now so that they are absolutely front of mind when it gets here,” she says. “When the hype around Amazon subsides somewhat, [customers are] going to remember those brands.”

Lifting the proportion of online sales will be helped along by store consolidation, as established apparel players begin to “put the foot down” with landlords.

SFG will close more than 45 stores in FY18 across all of its brands, depending on whether landlords will ease on rental terms, with Perlstein already signalling that the group will end the year with less than 1,000 stores.

Fiske will close 10-15 of Billabong International’s Australian locations, while RCG is restricting its portfolio expansion to a few select brands in its portfolio.

Walker says the move is evidence that the canary has well and truly flown from the shopping centre, and that vacancy rates, currently sitting between 95-99 per cent across Vicinity, Scentre, Stockland and GPT centres, will start to increase.

But Colliers International’s director of research Daniel Lees says there are plenty of traders in the wings ready to pick up the slack.

“Despite some of retailers announcing store closures, there’s a good chance that retail landlords will be able to maintain high levels of occupancy given the level of outstanding tenant demand,” he said.

Colliers’ research indicates that there’s currently around one million square metres of unmet retail tenant demand in Australia, primarily targeting super prime regional assets on the eastern seaboard.

The key question mark hanging over Australia’s established players is how well individual players will be able to handle the transition to smaller, leaner and increasingly digital-facing consumer offers? In that sense, FY18 will be a pivotal year for many.

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