The 2019 reporting season is expected to reflect a highly challenging period for retailers, but it could set the stage for a more comfortable FY20, according to analysts at Citi.
Citi analyst Tony Brennan told media on Wednesday that slowing momentum in the last financial year may not reflect the conditions they will be trading under over the next few years.
“While much is negative now, the next two to three years could be far more positive,” Brennan said.
Retail analyst Bryan Raymond said that in the short term, Citi expects retail to deliver mixed trading updates – which has already been reflected by the likes of Temple & Webster, Kmart, Kogan, and David Jones.
“While 2h19e was a particularly challenging period, only Kmart, Target, Adiars and Michael Hill downgraded on weaker trading conditions,” Raymond said.
“Retailers have worked hard on generating cost efficiencies to offset a weak sales growth environment. As a result, we expect the focus of reporting seasons to be on result quality and the read through they provide for FY20e.”
Much of this growth is expected to come from tax refunds and rate cuts putting more cash in consumers’ pockets. This is unlikely to be reflected in August trading updates, and more likely to be fully reflected in future updates in October.
“I know it feels tough out there, but I think things are starting to improve,” Raymond said.
Citi largely is forecasting a slowdown in like-for-like sales across the broader retail industry – though certain retailers are tipped to buck this trend.
Coles, for example, is expected to see strong growth over the second half of 2019 due to food inflation boosting the industries top line growth.
With the success of Coles’ Little Shop campaign last year, the Little Shop 2 campaign could have a large impact on the quarter, despite Woolworths’ Ooshies campaign occurring at the same time. Raymond called it an “interesting period” for the supermarket.
In terms of the full year, however, Raymond expects fairly low-level growth for Coles, with an NPAT of $897 million – down 4 per cent year-on-year.
Raymond expects JB Hi-Fi’s July trading update to be ‘critical’ to restoring confidence in its earnings outlook, after trade disruption from the election period, weaker activity levels, and an elevated TV deflation.
As such, the retailer’s earnings before interest and tax is expected to decline over the second half of FY19 by 5 per cent, depending on the gross margin recovery of The Good Guys.
“The Good Guys gross margins fell by ~200bps in 2H18, which we expect to recover by 80bps year-over-year in 2H19e,” Raymond said.
“While the competitive environment has been better, the guidance range indicates this recovery may take longer than expected.”
Access exclusive analysis, locked news and reports with Inside Retail Weekly. Subscribe today and get our premium print publication delivered to your door every week.