Investment confidence in retail waning

Arrow, down, failure, fall, decline, dropThe Australian Stock Exchange has endured a rollercoaster ride in recent months as uncertainty about global economic conditions and continuing political malaise undermine confidence.

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However, the prevailing market conditions don’t explain the lack of investment confidence in three major retailers and a degree of wariness about others whose future prospects are being closely scrutinised.

Woolworths, Australia’s largest retailer, Myer and Metcash are all under pressure from investors, who remain yet to be convinced about their business strategies, while David Jones and Kathmandu are also generating questions.

While Woolworths, Myer and Metcash have each recovered a little ground on the volatile share market in the past fortnight, each of them is well shy of their valuations around April of this year.

Woolworths traded late last week at around $26.22, up from a low point of $24.23 on September 29, but down significantly on the $29.80 per share return of April 28.

Metcash shares were priced around $1.17 last week, a recovery on the bare 98 cents they fetched on September 21, but well below the $1.46 on offer in April.

Myer shares were bargain basement material at just 88 cents last week, albeit up five cents on September 24. But that’s cold comfort against a price of $1.46 on May 19, shortly after new CEO Richard Umbers indicated the current turnaround plan was well advanced.

The April share prices happen to be the high point for each of the retailers in past six months – but they are all well shy of their former glory.

Indeed, Myer shareholders who bought into the re-float of the venerable department store chain for $4.10 in November 2009 deserve a medal for bravery, while Metcash shares have effectively halved in value in the past two years.

The problem for each of the retailers is that investors are not confident about the strategic direction of the three big guns and, in the cases of Myer and Metcash, are not even certain they have a viable future.

Woolworths survival is not in question, but there is negative sentiment about the retailer’s strategic direction under CEO Grant O’Brien and concern about the turnover of senior executives.

With a new CEO yet to be found, Woolworths is virtually in limbo.

With the company’s re-shaped board of directors, and O’Brien now effectively a caretaker CEO, investors are uncertain what direction Woolworths will take. There is also uncertainty around whether or not it will exit O’Brien’s baby, the loss-making Masters Home Improvement, and even the struggling Big W discount department store chain.

Many financial analysts are pushing for the abandonment of the Masters Home Improvement chain, with their calculations indicating a significant improvement in the value of Woolworths.

The retailer continues to doggedly defend its decision to stick with both the hardware venture and Big W. But a new CEO and the restructured board will need to review the investments and provide the market with evidence that both can contribute to sales and earnings growth going forward.

Metcash, Woolworths facing similar challenges
Metcash directors and its re-engineered management team are faced with the same challenge as Woolworths, but are arguably under greater pressure because analysts calculate that the listed wholesaler would be worth more if it was broken up to allow some of its business entities to be sold off.

Interestingly, Woolworths and Metcash have both already divested themselves of businesses that they considered did not fit their longer-term plans.

For Woolworths, the sale of the Dick Smith business was one of the first O’Brien era decisions to raise eyebrows and focused more attention on the company’s business strategies as much as on its slower growth compared to archrival, Coles, in supermarkets.

Woolworths took a substantial write-down on its accounts after closing under performing stores in the Dick Smith chain and clearing stock, only to sell the business at an extraordinary bargain price to private equity investors.

The sale of the business, with sales of more than $1 billion and bottom line profits, notwithstanding the fact they should have been better, at the bargain price of $20 million, has never been adequately explained by Woolworths.

The deal did include a sweetener, with an additional payment to Woolworths based on an improvement in Dick Smith’s trading performance and an anticipated listing on the Australian Stock Exchange.

But the private equity investors, Anchorage Capital Partners, had by far the better end of the deal.

In a similar move, Metcash has recently divested its automotive division for $275 million to the Burson Group after deciding just two years after moving into the category that it would not be able to achieve the scale necessary to secure an adequate return on investment going forward.

In Woolworths’ case, the Dick Smith divestment was based on the company’s difficulty in operating a specialist retail chain as distinct from a big footprint mass merchandise business.

Metcash faced the same challenge in terms of the specialisation of the automotive categories – but also the problem of scale.

Myer skepticism remains
Myer is in a different boat to both Woolworths and Metcash. It has nothing to sell off.

After focusing on a supermarket strategy of store expansion under former CEO Bernie Brookes, Myer is now contracting in a bid to find a sustainable platform for growth that leverages off prime bricks and mortar store locations and an expanded online presence.

Despite new store openings and refurbishment of all of its major stores as well as some initial success from online retailing under Brookes, Myer failed to boost sales or profits.

Umbers is facing an uphill battle to convince investors that the retailer’s new strategy is any more likely to succeed than Brooke’s strategy.

Investor sentiment was underlined by low acceptance of a rights issue on shares that was supposed to raise funds to support Umbers’ strategy.

Long-suffering Myer investors took the view that it would be like throwing good money after bad and, in any event, the issue coincided with the steep plunge in the share price that has shown little impetus for recovery since.

Of course, Myer did itself no favours at the time, going cap in hand to investors for more spending money while also announcing that profits for the 2015 financial year were below market forecasts.

Most analysts don’t believe Myer is opting to close enough stores or that other parts of its strategy will work, in large measure, because the retailer’s fatal flaw is being under-manned on the shop floor.

They have heard before of re-allocation of space within stores and revamping of ranges, as well as expectations of a glorious online future.

The analysts just don’t believe Myer has credibility or, for that matter, the management firepower to improve the retailer’s performance and long-term prospects, notwithstanding that the closure of some under-performing stores should help the bottom line.

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