ODT Business Reporter Simon Hartley previews the pending reports of The Warehouse, Briscoe Group and Hallensteins Glasson with brokers Peter McIntyre, from ABN Amro Craigs, and Peter Young, of Forsyth Barr.
Retailing has been hard hit around the country already as consumers come to terms with the need to spend wisely in the face of the mounting recession, to which New Zealand was one of the first developed countries to submit.
How hard the recession bites here hinges on the fortunes of the equities and financial markets in the United States and Europe in the months ahead, and how investors respond to the multi-trillions being pumped into failing companies by governments.
In the meantime, analysis of listed retailers by brokers ABN Amro Craigs and Forsyth Barr indicates further margin pressure on sales, an uncertain outlook and expectations of retail trading to continue to be down in general.
ABN Amro Craigs broker Peter McIntyre said the retail trading environment for The Warehouse was expected "to remain difficult for the next two years".
Because of the potential for a takeover or sale of The Warehouse, Mr McIntyre said its earnings remained a sideshow to potential corporate activity in the months ahead, believing founder Stephen Tindall and family interests would consider selling only with an offer above $6 a share.
Woolworths had abandoned its application seeking leave to appeal to the Supreme Court to continue with a takeover bid.
"Assuming Stephen Tindall is a seller, there would presumably be separate meetings with both Woolworths and Foodstuffs," Mr McIntyre said.
Woolworths and Foodstuffs each own 10% of The Warehouse and Stephen Tindall and family interests have 52%.
He said the key attraction for Woolworths and Foodstuffs was the number of Warehouse and Blue Shed sites around the country "which they would find it difficult to replicate".
The Warehouse has 85 Red Shed stores around the country and 44 Blue Shed (stationery) stores.
"Both interested parties are looking at the Warehouse from a long-term strategic basis and would be looking at its long-term earnings," Mr McIntyre said.
Forsyth Barr broker Peter Young said sales at the Warehouse continued to decline, with Red Shed revenues in the 10 weeks to early January down 2.5% and its stationery division down 9.4%.
He expects its first-half trading result to be similar to last year's $56.8 million result.
"The Warehouse's performance has been disappointing and it faces a difficult retail environment with falling sales and cost pressure," Mr Young said.
Mr Young said despite Forsyth Barr "trimming" its full-year 2009 and 2010 after-tax forecasts by about 2%, with the potential for a takeover being positive for the company, the recommendation remained to "accumulate" Warehouse stock.
"The outlook remains uncertain, with consumer spending expected to remain weak, although the company aims to offset the negative impact of currency movements," Mr Young said.
He said although Forsyth Barr had lifted Briscoes' full-year after-tax profit forecast from $10.5 million to $12 million, that was well down on the 2008 actual after-tax profit of $22.4 million.
"Sales are in decline and margins under pressure in both homeware and Rebel Sport," Mr Young said.
Despite the declining margins, Mr Young believes margins on earnings before interest and tax (ebit) would return to around 8% in homeware and 6% at Rebel Sport during the next three to five years.
Although Briscoes share price was not expected to recover quickly during the recession, Forsyth Barr saw the longer-term value in the ebit growth and in early-February had upgraded its recommendation to "accumulate" Briscoes stock.
Mr McIntyre said forecasts of Briscoes had been downgraded, with a recovery period now pushed out to the full-year 2011.
"With the increasing prospect of higher unemployment this year and shoppers being prudent on discretionary spending, we believe any significant recovery in retail spending in New Zealand may be some way off," Mr McIntyre said.
Mr Young said Hallensteins Glasson's after-tax profit is expected to be down about 40%, from $9.2 million for the same period last year, to between $5.4 million and $5.6 million.
Forsyth Barr's full-year after-tax forecast remained at $11 million, well down on last year's $15.9 million result.
"The outlook over the next few years is not encouraging, with low sales growth and margin pressures likely to continue in a more difficult retail environment," he said.
Mr Young cautioned that there was "potential for negative surprises" from Hallensteins which prevailed with a "hold" recommendation in place on the stock, he said.
Mr McIntyre's forecast for Hallenstein Glasson's first-half report, due later this month, mirrored Mr Young's with an expectation its after-tax profit would be down 40% on the previous year at $5.4 million.
However, he said going into 2010, ABN forecast a 3% increase on Hallensteins Glasson's after-tax profit, up to $6.9 million, followed by a strong recovery a year later.
Mr Young said all three companies had experienced "very tough times" and while consumers' pockets were "steadily getting deeper", he emphasised The Warehouse was expecting a similar full-year result which gave "at least some" positive indications for the sector.
Mr McIntyre said key elements for all three retailers were they did not carry excessive debt levels and had "wily and experienced" management who had survived recessions in the past and would know how to counter or dampen the effect of increasing margin pressure.
"The three will be surviving through to be around for the next up-turn in the economy," Mr McIntyre said.
•The financial disclosure documents of Mr McIntyre and Mr Young are available on request.
Retail situation
Reporting Dates
The Warehouse: March 12. First half report to the end of January.
Briscoe Group: March 16. Full year report to end January.
Hallensteins Glasson: March 27. First half report to February.
Broker Recommendation
Forsyth Barr.--
Hallensteins Glasson. Hold; medium risk, valuation $2.92.
The Warehouse. Accumulate; medium risk, valuation $3.66.
Briscoe Group. Accumulate; medium risk, valuation $1.33.
ABN Amro Craigs.--
Hallensteins Glasson. Hold; valuation $2.15
The Warehouse. Buy; valuation $6
Briscoe Group. Hold; valuation 77c
