Is retail sector facing a cool-down?

nzherald.co.nz/business Poor festive season takings for Kathmandu could indicate a trend, according to analyst

Retail sector investors were given a hint as to what may lie ahead after Australasian outdoor goods chain Kathmandu reported disappointing sales over the all-important Christmas break.

Kathmandu management said sales in December had been below expectations but margins had improved.

“Following strong same-store sales growth in Q1, we are disappointed in trading results in Australia and New Zealand over the Christmas and Boxing Day period,” chief executive Xavier Simonet said in a statement.

The sales update sparked a sharp sell-off in the company’s shares, the stock at one point dipping by 40c or 14 per cent to $2.35.

The other NZX-listed retailers The Warehouse, Briscoe Group, Michael Hill International and Hallenstein Glasson, are expected to release their Christmas sales updates over the next few weeks.

“What we are seeing is a very competitive environment out there for retail, and Kathmandu is a very good retailer,” Shane Solly, portfolio manager at Harbour Asset Management said.

Solly said Kathmandu’s improved margins were positive, the company was operating profitably and that it remained in a favourable position.

“There is no doubt that the environment for retailing has cooled significantly, both in New Zealand and Australia,” he said. “The question for me is, what does this suggest for the other retailers?”

The experience in Australia showed there had been a strong correlation between the retail sector and real estate, as the so-called wealth effect went into reverse gear in line with weaker house prices.

Kathmandu said at its annual meeting in November that, based on trading during the first 15 weeks of the fiscal year, its first-half profit was expected to be “strongly above” last year, depending on how its summer sale performed.

Now, it appeared that a more modest gain was likely.

“Notwithstanding the adverse impact of the NZD/AUD exchange rate on reported profit, assuming current trends continue, total group profits are now expected to be 4-8 per cent above the first half of 2018,” the company said.

For the six months to January 31, 2018, the company reported profit of $12.3m, up 23 per cent on the same period last year.

Kathmandu’s sales report follows a sudden fall in petrol prices preChristmas, which had given the sector some cause for optimism.

Equity research company Shareclarity said Kathmandu’s weak Christmas sales had been offset by margin expansion.

“Weak sales are expected to continue and weak Australian and New Zealand dollars, to the US dollar, will put pressure on margins,” said Shareclarity in a research note.

Kathmandu’s same-store sales for the 22 weeks to December 30 were below the prior year’s by one per cent, at constant exchange rates.

Same-store sales were below the prior year by 0.2 per cent in Australia, and by 2.4 per cent in New Zealand, it said.

Partially offsetting lower than expected sales for the first half was a 60 basis point improvement in retail gross margins to about 64 per cent.

Oboz — the American footwear company bought by Kathmandu last year for US$60 million ($90.4m) — reported that its sales for the first half were expected to grow by about 35 per cent to about $27.5m, with a gross margin of 40 per cent.

Kathmandu’s first half result is due on March 26.

The question for me is, what does this suggest for the other retailers? Shane Solly