Australia’s 2018 financial year

Myer, Wesfarmers, Specialty Fashion Group, Retail Food Group and Premier Retail were among the retailers that took hits to profits and balance sheet valuations in the 2018 financial year.

But while there were some sizeable adjustments to their accounts, with the exception of Myer, the underlying trading performances were not alarming.

Specialty Fashion Group managed to offload most of its struggling retail brands to Noni B, Wesfarmers cleared the decks on its failed Bunnings UK venture and the underwhelming Target, and Premier Retail adjusted the goodwill value of its apparel brands.

Retail Food Group has been in a downward spiral for the past 10 months after cracks emerged in its franchising model. Write-downs can make a profit result look sickly, but as Woolworths has shown it pays to take the medicine and restore the integrity of the balance sheet, especially at this time ahead of new accounting standards that will require retailers to include lease obligations in their financials.

That change will no doubt come as a shock to many investors and shareholders, and explains both the timing of goodwill writedowns
and some of the lease exits over the past two to three years by chains that can no longer afford to carry unprofitable stores with hefty overheads.

Woolworths took a major hit to its accounts on its exit from Masters Home Improvement and wrote down the value of the Big W chain, but it has subsequently regained investor confidence and enthusiasm with the renewed focus on its core food and liquor business.

Metcash has also adjusted its balance sheet and in the short term, has reported positive results albeit a longer-term challenge looms following the decision of a major customer, Drakes supermarkets, not to renew a supply contract and to establish its own warehouse operation.

Sigma Pharmaceuticals faces the same problem following the loss of 25 per cent of its wholesale sales from July 2019 when Chemist
Warehouse switches to EBOS.

Given the challenging economic and political conditions that have sapped consumer confidence and restrained spending as well as
the corrective actions of the retailers I have mentioned, the 2018 financial year results from the retail sector were arguably better than
might have been expected.

Among the positives were solid results from Woolworths, JB HiFi, Wesfarmers’ Coles, Bunnings and Kmart brands, Premier Retail and Noni B.

Super Retail Group posted a healthy 7 per cent lift in sales for the year and improved earnings although it has to address a legacy issue on underpayment of staff.

Despite ongoing concerns about underpayments of staff in the Domino’s Pizza Enterprises franchise system, the company continued its merry way in respect of sales and earnings growth.

Furniture retailer Nick Scali posted a 7.7 per cent increase in sales and a 10 per cent gain in earnings, in part boosted by store network
expansion, including a move into the New Zealand market.

The Reject Shop only managed a modest 0.8 per cent lift in sales, impacted by competition from the discount department store chains
and retailers such as Costco and Aldi.

The Reject Shop managed a 34 per cent lift in earnings but has warned that it expects the retail market in its category to remain challenging.

Baby Bunting posted a sales increase of 9 per cent for the latest financial year although its profits were hit by stock liquidations by several failed competitors, including Toys R Us.

Beacon Lighting has been one of the most consistent performers of the retailers on the Australian Stock Exchange and in FY18 increased sales by 9.7 per cent and net earnings by 17.7 per cent. Similarly, Adairs lifted its sales in the year to June 30 by 18.8 per
cent and churned out a remarkable 45.4 per cent increase in earnings.

Lovisa, which has successfully ventured into overseas markets, was another solid performer in FY18 with a boost in revenues of 21.4 per cent and net earnings up 23.8 per cent.

So despite challenging retail conditions and increased bricksand-mortar and online competition, the financial results booked by retailers in FY18 were promising and provide some cause for optimism for Christmas trading this year.

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