On Wednesday, the Australian Financial Review said some Australian specialty fashion stores were ready to get out of their share price slump.
They wrote:
‘While budget-related initiative could be expected to place a drag on consumer spending there are some items that you can only put off so long. Clothing certainly comes into this category, and analyst at Citi noted last week after two years there must be pent-up demand and it is seeing evidence that specialty clothing stores are doing well.
‘However, if consumers are looking for that balance between replenishing the wardrobes and keeping the purse strings reasonably tight, it should be the low to mid-price point retailers that benefit most of from these dynamics.’
The Citi analyst reckons there must be pent up demand so surely these types of retailers should benefit from that. They should also start to benefit from something known as the trading down effect.
Think of it like this.
There are certain staples most people need. When you’re conscious of your personal budget and there are some things you still have to buy, you choose to buy cheaper alternatives.
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Say for example you need a new frypan. Rather than going to a fancy home wares stores where you are scared to spin around for fear of knocking something over (and then cry at the prices), you may head to Target or Kmart — owned by Wesfarmers [ASX:WES] — instead.
What about new shoes? Again, in penny pinching times you’re more likely to head to a River’s store — owned by Specialty Fashion Group [ASX: SFH] — to buy a cheap pair of shoes, rather than a more upmarket shoe store.
Same applies to furniture. In spite of your best efforts on eBay or Gumtree, you may just have to buy a new couch to replace your well-worn one. Tight-times see you head to Fantastic Furniture [ASX:FAN] rather than Harvey Norman [ASX:HVN].
But there’s a problem. For the past two years it seems all retailers (except Kmart) have either lost revenue or can barely maintain it.
Why?
Consumer sentiment is down. Westpac’s consumer sentiment index touched 99.7 in April. That’s far below the 2010 peak of almost 120.
Yes, general retail spending is down by 6% compared to last year. However all of these companies I mentioned that should benefit aren’t. In fact, just like their fancy retail brothers and sisters, earnings are flat.
Few of these retailers have been able to cash in on consumers changing their spending habits.
The only reason Kmart has kept ahead of the rest is because of a very clever and aggressive strategy from Guy Russo.
Kmart has flourished because Russo decided to stock everyday products that parents need versus big one off items. Furthermore, Russo did away with middlemen and brands. Almost every product in Kmart is designed in house rather than sourced through suppliers.
He challenged the idea of sales cycles, preferring a consistent low price strategy. And finally he actually invested money in staff and staff training.
But at earnings announcements or forecasts, you’ve heard the usual cry from most other company CEOs — High rents with inflexible landlords, high wages, and consumers unwilling to spend.
But here’s the problem.
Sure, high wages and rent can hit margins. But there are still people spending out there.
And our tough retailing conditions aren’t new. It’s been mostly downhill for discretionary spending for almost three years.
Well, the reason the AFR says some companies are going to bust out of their trading funk is because, ‘Smart retailers are actually putting in place omni-channel systems’.
To you and me, omni-channel systems is a fancy way of saying it’s an alternative to bricks and mortar retailing…like, say, online shopping.
But here’s the thing.
Internet shopping isn’t new.
In fact, I distinctly remember my first experience with online shopping with an Australian retailer in 2003 or 2004. That one parcel delivered to my office had me wondering if I’d ever bother with a Westfield shopping centre again.
And I’m confident this retailer didn’t launch an online platform just for me. But here was the first warning sign consumer behaviour was going to change.
And yet, many years later, retailers are still lagging behind the consumer. They still don’t get it.
The analysts at Citi may reckon ‘pent up’ demand is about to drive business to these low to mid cost retailers.
I wouldn’t bet your house on it.
Instead, our advice is to look for retail stocks that have picked up on the change in consumer trends.
It’s something Australian Small-Cap Investigator analyst Tim Dohrmann is following closely. And he has a neat way for investors to play this trend.
Shae Smith+
Editor, Money Weekend
