Hard times are ahead for the retail sector, with profit forecasts for major companies in sharp decline, but consumers with spare cash will find no shortage of bargains during the next 18 months.
The reporting season for listed companies is more than 90% complete, and the retail sector's bottom lines for the first half of the year, and their outlook for the second half, give an important snapshot of the economy, ABN Amro Craigs broker Peter McIntyre says.
Starting on Friday, The Warehouse is forecast by ABN to report a decline of almost 15% in after-tax profit to $78.5 million, Pumpkin Patch almost 20% down on profit at $18.7 million and Hallenstein Glasson a decline of almost 30% to $15.1 million.
"Their margins have been squeezed by higher costs, in rents, aggressive selling of winter stock by competitors, a rise in wages and inflation," Mr McIntyre said.
He predicted the large retailers would ramp up marketing campaigns during the next 12 to 18 months to soften the blow from the recession, which might include advertising loss leader goods, sold at less than cost to attract customers, "aggressive leadership pricing" and an extension of the already prevalent low interest, or no-interest terms over several years, Mr McIntyre said.
"The second half is going to the one of `survival of the fittest' with the likelihood of some rationalisation in the retail sector. I'd expect the marketing to become innovative," he said.
While consumers face increasing household costs, from recently reset mortgages, energy and transport, they might expect some relief from tax cuts and falling interest rates towards the end of the year.
"The retail market will be good for those with some discretionary spending," he said.
However, with house prices waning and homeowners subsequently "feeling less wealthy" the following 12 to 18 months will be difficult for the retailing sector, Mr McIntyre said.
The large retailers are going to find it difficult to claw back significant earnings growth and there will be a subsequent negative impact on dividends for investors.
ABN is forecasting an 8c per share cut to Hallensteins' dividend, 1.5c cut to Pumpkin Patch and likelihood of no change to Warehouse dividends.
Pumpkin Patch, which now has outlets around the world, will find any fall in the strength of the New Zealand dollar positive for earnings and New Zealand and Australia may be its "bread and butter" earner for the second half of the current financial year, he said.
Pumpkin Patch had enjoyed significant growth in UK markets, but that gain could be eroded by escalating production costs in China (up to 25%) and rising wage and rental costs in the UK, he said.
