A 0.5% rate cut can’t stop this sort of slide in retail sales and, more importantly, profits.
A nasty 44% plunge in third-quarter profit by Harvey Norman makes it easier to understand why activity in the economy’s services sector has slumped to a three-year low. According to today’s report, the performance of services index conducted by the Commonwealth Bank and the Australian Industry Group slumped 7.7 points to a three-year low of 39.6 points last month: that’s as low as it is in some of the recessed economies of Europe.
It is significantly worse than the 5.6-point fall in the manufacturing survey for April, which reached 43.6 points, the lowest since last September. The RBA’s 0.5% rate cut won’t be the last (Europe though will be the driver if the elections this Sunday turn out for the worse, especially in France), and it will have very little impact for retailers such as Harvey Norman, no matter what some analysts might say. The factors driving Harvey Norman’s sales and profits lower are beyond the control of the RBA, and the company. That applies to many other retailers.
The Harvey Norman performance was a significant worsening of its first-half slide in earnings and came on another drop in sales: down 9.2% on a headline basis in the important Australian market in the quarter and 7.7% lower on a same store basis.
The news follows profit downgrades in the past fortnight from several other companies, including its retailing rival JB Hi-Fi, which cut its net profit forecast to about $100-105 million from the expected $119 million. JB Hi-Fi experienced a 1.3% fall in third-quarter same-store sales and 2.5% for the fourth quarter, which equates to out-performance when compared with Harvey Norman’s report yesterday.
But the news from Harvey Norman was miserable. Its pre-tax profit for the first nine months of the financial year fell 24.8% to just over $204 million (a fall of more than $67 million for the latest nine months). It means the company earned about $16 million in the three months. No wonder the third-quarter report was two weeks later than the report for the third quarter in 2010-11.
The company blamed “aggressive competitor activity in the audio/video and information technology sector.” While Australian sales were impacted by falling prices for technology products, particularly flat-screen TVs, due to the high Australian dollar competition “has increased since the collapse of Queensland’s WOW Sight and Sound and the scaling back of the Dick Smith Electronics business” by Woolworths. JB Hi-Fi mentioned the same factors.
Harvey Norman said sales for the nine months to March 31 from its stores in Australia, NZ, Slovenia and Ireland fell 6.7% on a headline basis to $4.39 billion, and 6.6% on a same-store basis (like-for-like is the way Harvey Norman describes this measure). Worryingly, the company said, sales in April have continued the trend of the preceding three months.
Harvey Norman reported earnings before interest and tax in the 2010-11 year of just over $416 million. If the sales slide seen in the fourth quarter continues until June 30 (and from today’s statement, it seems it is), Harvey Norman is facing a fall of 30% or more in profit.
Harvey Norman isn’t alone in delivering gloomy news. While upgrades or positive reports (i.e. no downgrade) have been revealed (Tabcorp, Aristocrat, Brambles and Ausenco stand out), they have been few in number compared to the downgrades. Retailing has stood out, from David Jones forecast of a 40% second-half slide in profits to the latest news from JB Hi-Fi and Harvey Norman will go close to that level. Retailing, like the media, is facing significant structural change that will go on for some years. It is no longer a case of cautious consumers saving more and spending less in shops and more in services. That’s certainly the case, but the over capacity in too many outlets and too many malls, plus the high dollar and unease about over consumption are also factors hurting the sector.
Woolworths and Coles seem to be least affected being concentrated in food, but they are having to deal with price deflation, especially in fruit and vegetables, which is depressing sales growth. Coles though does have the top-performing department store chain in Kmart, then one of the laggards in Target, while Woolies Big W chain is struggling to make headway.
Even the ASX itself, the heart of the capitalist system, is feeling the pinch. This morning, it reported a 2.9% fall in the nine months to March to $256.3 million. Lower trading volumes (from the second quarter onwards) and the start of the rival Chi-X exchange were blamed for the weak result.
Crikey is committed to hosting lively discussions. Help us keep the conversation useful, interesting and welcoming. We aim to publish comments quickly in the interest of promoting robust conversation, but we’re a small team and we deploy filters to protect against legal risk. Occasionally your comment may be held up while we review, but we’re working as fast as we can to keep the conversation rolling.
The Crikey comment section is members-only content. Please subscribe to leave a comment.
The Crikey comment section is members-only content. Please login to leave a comment.