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A rocky half for local retailers

DavidJonesThe halfway mark of FY18 is looming as a watershed period for the retail industry in Australia.

Low growth economic conditions, changing consumer behaviours and the internet have inflicted the most savage wounds yet on some bricks-and-mortar titans, wounds that are being quantified in current half year trading results.

The headline casualties include Myer, David Jones, Target and Bunnings’ UK venture – all are reporting significant balance sheet writedowns in their first half results.

However, there could well be others such as Specialty Fashion Group which is currently conducting a business review and the Australian operations of the faltering South African retailer Steinhoff International and Michael Hill International which is closing its stores in the US.

The current series of writedowns may also likely prompt analysts and financiers to scrutinise more closely the goodwill valuations retailers have sitting on their balance sheets as the internet threat bites.

David Jones was the first of the major retailers to announce a non-cash impairment charge on its FY18 accounts, cutting $712 million from its balance sheet.

The impairment provision is around one third of the $2.2 billion the South African retailer, Woolworths, paid to acquire David Jones in 2014.

Despite rolling out its strategy to upgrade food halls in the department stores and to establish standalone branded David Jones food stores, Woolworths has written down the carrying value of its investment in Australia.

In a statement to the Johannesburg Stock Exchange, Woolworths said the writedown reflected “tough and unprecedented” trading conditions, a cyclical downturn and structural changes that had impacted performance across the Australian retail sector.

Woolworths also conceded that impairment had been exacerbated by delays and poor execution of key initiatives at David Jones. However, the execution issues were included in trading results rather than the non-cash writedown that has wiped out the premium paid to shareholders of David Jones.

David Jones sales for the full FY17 were up by 1 per cent, although comparable sales managed a mere 0.7 per cent lift and net earnings fell by close to 30 per cent.

Woolworths has yet to announce its results for the first half of FY18 but it is understood sales were down close to four per cent in the period.

The publicly-listed South African Woolworths is not related to the Australian company of the same name, which is currently recovering ground in its core food and liquor businesses after writedowns on Big W, the Masters Home Improvement and, before those provisions, Dick Smith.

More woe for Myer

The David Jones balance sheet writedowns would seem to put paid to the rumours that the South African Woolworths might make a bid for the floundering Myer.

Myer has been testing investor confidence with sales and earnings declining, stores being closed or, in part, turned to clearance centres, and little evidence of any traction in a turnaround strategy.

The dramatic fall in Myer’s share price and continuing sales and earnings results has prompted the retailer to undertake an impairment assessment of the carrying values of assets on its balance sheet.

Myer has previously had to make a provision in its accounts for the collapse of the Topshop chain and is now certain to announce a significant non-cash impairment when it details its FY18 half year trading results next month.

Myer’s balance sheet values its goodwill and intangible assets at $986 million but on the current share price of below 60 cents, Myer has an enterprise value of around half that figure at about $460 million.

Myer has announced three profit downgrades in the past two years, crucially one of them was on 14 December when the cash registers should have provided some cheer to investors.

A further update to the Australian Stock Exchange (ASX) last week indicated total sales for the first half ended 31 January were down 3.6 percent to $1.72 billion, while like-for-like revenue was down three per cent even after turnaround initiatives.

Myer has indicated net earnings for the half are expected to be in the range $37 million to $41 million, down from $62 million booked in the comparable period in FY17.

Last week’s announcement noted that sales were down by 5 per cent in the first two weeks of December and then fell again in the stocktake period with January sales down by an alarming 6.5 per cent on the same month last year.

Richard Umbers – who stepped down as Myer CEO on Wednesday – said Myer does not anticipate an improvement in retail trading conditions during the second half and, given the recent sales volatility, is not providing any profit guidance for the full FY18.

Last week’s statement sought to retain investor support in the ongoing, challenging and competitive retail conditions but key investor, Solomon Lew, is ready to resume hostilities from late last year by attacking Umbers’ turnaround strategy the retail experience and competence of the Myer directors and senior management.

An update from Wesfarmers

The wisdom of Wesfarmers’ acquisition of Homebase is again being questioned by analysts and investors after the company has announced a $177 million trading loss for the last year and a writedown on the carrying value of the venture.

Wesfarmers has indicated its half year results announcement on 21 February is expected to include a non-cash impairment of $795 million for the carrying value of the Homebase/Bunnings UK business.

Wesfarmers will also book an after tax impairment charge of $300 million on the struggling Target discount department store chain.

According to a statement issued last week to the ASX by Wesfarmers, Target’s financial position has been “stabilised”, although sales for first half FY18 were still below expectations.

Wesfarmers said the company would writedown the carrying value of the Target chain to reflect a more conservative outlook for the business.

There is increasing speculation that Wesfarmers may abandon the UK hardware venture which holds the second largest market share in the category in Britain, but has yet to stem trading losses despite store conversions, range and marketing changes.

Michael Hill loses its sparkle

Michael Hill International is another retailer booking a provision in its accounts for the latest half after deciding to quit the US market after sales in its retail chain fell by 10 per cent in the period.

The jewellery chain will report a non-cash impairment of $20 million to cover store closures and other provisions.

Michael Hill International has indicated its earnings for the half year will be around $15 million, down from $40 million for the comparable half in 2017

Phil Taylor, the chain’s CEO, has announced a set of strategic actions, including a brand repositioning of Emma & Roe, along with the planned exit of its US operations, to strengthen the company’s retail network and long-term operating performance of its core businesses.

Taylor has indicated that the full year trading result may be impacted by the outcome of negotiations with landlords in respect of store exits.

SFG undergoes comprehensive review

Consideration of the carrying value of the various brands and goodwill of Specialty Fashion Group (SFG) will also be on the agenda for incoming CEO, Daniel Bracken.

Recruited after the resignation as CEO of Gary Perlstein, Bracken will either oversee the sale of all or part of the multi-brand retailer or will need to implement the findings of a comprehensive business review.

FTI Consulting has been assisting directors of SFG with a comprehensive structural review and assessment of all options and opportunities for the company to improve shareholder value.

SFG, which owns the Millers, Katies, City Chic, Autograph, Crossroads and Rivers, has posted losses of more than $15 million in past three financial years and suffered a 75 per cent fall in earnings for the first half of the current financial year, albeit at least in positive territory with a $3.1 million net profit.

The future of the local operations of Steinhoff International is also unresolved, with Australian banks monitoring trading results and assessing the balance sheet and debt obligations.

Steinhoff International’s local arm owns Fantastic Furniture, Freedom Furniture, Snooze, Harris Scarfe and Best & Less and has a license agreement to open Debenhams stores in Australia.


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