Weaker year ahead

kathmanduFaltering first half sales for two major retailers raise questions about consumer confidence and the outlook for retail sales in 2015, but also indicate that aggressive expansion is possibly cannibalising their sales.

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JB Hi-Fi has produced top line sales growth of 1.3 per cent for the half year ended December 31, but comparable store sales fell by 0.7 per cent in the period despite expansion into new categories.

Kathmandu has maintained strong topline revenue growth of 6.9 per cent and a creditable 2.8 per cent in same store sales, but the chain’s profits have crashed as its higher operating costs overtake its deep discounting strategy.

Both have pursued aggressive expansion strategies that have secured market share gains, top line sales growth and, until this half, solid earnings vis a vis other retailers.

There is now little doubt that the reporting season for the retail sector will reflect a disappointing first half as consumers continue to restrain their spending.

The political ructions in Federal and State Governments, including the elections in Victoria and Queensland, reflect the concern of consumers as much as voters about the economy and jobs and, while it has been welcomed by the retail industry groups, the latest cut in interest rates is unlikely to boost confidence and spending.

JB Hi-Fi and Kathmandu, along with The Reject Shop, Super Retail Group, and Country Road, have been the most consistent performers in sales growth for several years but only Country Road has maintaining solid growth in the past 18 months.

Super Retail Group has considered the cannibalisation issue as part of a review of its business, but the other three chains are apparently not overly concerned about the issue and are continuing with expansion plans.

Richard Murray, JB Hi-Fi’s CEO, is confident the chain will generate a stronger sales performance and meet its profit expectations for the full financial year after more robust sales in January that lifted same store increases by seven per cent and improved year to date comparable store sales from the negative 0.7 per cent of the first half to a positive 2.2 per cent.

The improved sales have been driven by deep discounting as part of new year sales and bombarding customers with deals on emails, three or four emails a week.

Kathmandu has used the same tactic with incessant emails promoting deep discounts that have now arguably damaged the chain’s pricing structures.

It has apparently exhausted its discount strategy, and new CEO, Xavier Simonet, now faces some critical decisions on the product range, discounting and marketing strategies, and store development.

Simonet is due to take up his position in six months, with acting CEO, Mark Todd, focused on a turnaround in the second half of the current financial year.

The chain has indicated it will post its first loss since floating on the Australian Stock Exchange five years ago.

The projected loss is between $950,000 and $1.9 million for the half, compared with a $10.8 million profit for the comparable period in 2014, despite a lift in top line sales from $159 million last year to $170 million.

Kathmandu’s same store sales have slumped and margins have fallen markedly as the chain attempted to clear excess stock.

Todd is hopeful of an improvement in the current half, with Easter and winter sales historically generating around 60 per cent of full year sales and up to 70 per cent of annual earnings.

Todd has reviewed promotional activity and adjusted marketing campaigns for the second half, but has not indicated whether Kathmandu will reduce the week in week out discounting activity that has impacted on its pricing credibility or refocus its store expansion.

JB Hi-Fi’s Murray would appear to have an easier task than Todd, as JB Hi-Fi has more opportunities in product ranges and can look to new technology products to help lift sales and earnings.

Despite this, JB Hi-Fi faces competition from online retailers in many of its categories, and earnings growth is likely to be constrained by the chain’s entry into lower margin categories as part of its JB Hi-Fi Home concept, higher operating costs, and weaker buying power resulting from the falling Australian dollar.

Murray believes the JB Hi-Fi Home format represents a “significant growth opportunity as it leverages the strength and trust” of the company’s brand, with annual sales of home appliances of around $4.6 billion and a trend towards “connected homes” that utilise new technology.

He says connected homes using smart appliances to control household appliances could generate between $500 million and $1 billion in annual sales.

Financial analysts are not quite so enthusiastic, noting that margins are under pressure in home appliances, and sales for the new format stores are lower than forecast.

There are 39 stores in the Home format following the opening of three new stores and conversion of 14 in the first half.

The chain plans to open two more new stores and convert another 11 JB Hi-Fi outlets for a target of 52 Home format stores by the end of the financial year, with a view to having 75 stores trading as JB Hi-fi Home by June 2016.

JB Hi-Fi has 185 stores across Australia and New Zealand, and has a published target of 214 stores, but the cannibalisation issue is now likely to become a consideration.

Net earnings for the first half of the 2015 financial year were down 1.9 per cent to $130 million compared to $132.9 million in 2014.

While store development has been a key focus for JB Hi-Fi’s growth, it also made a significant investment in online sales and achieved a 13.5 per cent lift to $48.7 million, representing two per cent of total revenues.

This story first appeared in Inside Retail PREMIUM issue 2032. To subscribe, click here.

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