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23
Nov-18
Friday

Coles ain't Aldi?

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The AFR reported that Macquarie and Goldman Sachs have mixed reviews on Coles' solo outlook post its demerger from Wesfarmers. Macquarie is cautious about Coles' plan to spend about $1 billion on two automated distribution centres, which will increase net debt to EBITDA from 0.7 to 1.1 times. The bank is also wary about the impact of new competitors, stating that "Kaufland could obtain around 1% market share quite quickly." On the other hand, Goldman Sachs expects Coles to grow earnings by increasing sales of fresh food and private label, shifting away from promotions to everyday low prices, opening new stores and cutting supply chain costs. This all sounds very familiar.

Noni B lifts profit guidance

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The AFR reported that Noni B expects earnings to rise 21% this year to $45 million, attributing the gains to synergies from its $31 million acquisition of five brands from Speciality Fashion Group in July - good news for shareholders. However, reading between the lines, there was a 5% fall in same-store sales across the group over the last four months, which doesn't present the best medium to long-term outlook for the retailer.

The death of (bad) retail

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In their 'The Future of Everything' section, The Wall Street Journal commented that just over a year ago, the future of brick-and-mortar stores looked dire. Back then predictions were made that a quarter of malls were expected to close within 5 years. The way out was apparently to turn them into entertainment centers. But, the WSJ pointed out that while some retailers have struggled, others have thrived. Technology that was supposed to kill traditional retail actually helped marry online and offline shopping. A number of innovative brands which started online are now moving into the physical space. We are pleased to hear that we are not the only ones who recognised that the retail evolution doesn't mean extinction.
22
Nov-18
Thursday

Supermarket's Game of Thrones

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The AFR reported that Woolworths is planning to cut back on capital spending, freeing up funds so it can drop prices and reduce household food bills while also returning money to shareholders. The article also notes that analysts and investors have been expecting competitive pressures in supermarkets to ease after Woolworth's $1 billion investment in price in 2016 and 2017 and following Coles' demerger from Wesfarmers. In our assessment, the analyst and investor sentiment would be correct, but only if there were no other players in the market. With Aldi, Costco and, soon, Kaufland all competing for their share of the pie - if anything, things will get more heated in the supermarket space.

Amazon lifts block on US site delivery

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The AFR reported that Amazon has made a U-turn on its decision to block Australian consumers from shopping on its US site after working out a way to add GST to online orders from overseas. Amazon outraged Australian consumers in June, when it said it would stop shipping from amazon.com and other international sites to Australian addresses from July 1, when the new GST regime came into effect. The move materially impacted Aussie consumers who lost access to both the US site's wider product range and cheaper prices. Reading between the lines, Amazon's decision to backtrack must be related to the commercial consequences of the "embargo".

The dark side of holiday shopping

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Forbes commented that as sales in the US surge, retailers brace for record theft. According to the article, 92% of US companies said they had been a victim of organised retail crime in the past year, and 71% of them said these incidents were increasing.  30% of retailers reported that their goods had been targeted by criminals while in transit.  The term 'organised retail crime' means large-scale theft of merchandise with the intent to resell it.  According to Forbes,  laws are becoming less of a deterrent, particularly as some US states have increased the threshold for a theft to be considered a felony instead of just a misdemeanour. It is worth noting that some of the stolen merchandise makes its way back to retailers as fraudulent returns. US retailers expect in excess of 10% of their holiday sales to be returned and 1/10th of it to be fraudulent.

Lowe's downsizing continues

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About two weeks ago we reported that Lowe's decided to close 50 stores in the US and Canada.  Reuters now reported that Lowe's is now looking to shed its retail operations in Mexico and two of its smaller US businesses as the (country’s second-biggest) home improvement chain strives to compete with rivals, including Home Depot. Lowe's CEO said the company failed to boost its sales due to the assortment of merchandise and an inability to restock shelves with the right kind of inventory, despite a rise in customer visits.  In our opinion: quite a fundamental mistake - what's the point in promoting the business, and then when the customers come in, fail to deliver?
21
Nov-18
Wednesday

Will The Reject Shop reject it?

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The AFR reported that The Reject Shop's was surprised this morning with a $2.70 a share cash takeover offer from Allensford Pty Ltd, which is owned by Ruffy Geminder's Bennamon Pty Ltd. It's a firm bid with no request for due diligence, no wish for presentation from management or any funding or regulatory conditions.  The bid is at a 19% premium to the stock's one month volume weighted average price. The AFR wonders whether The Reject Shop's shareholders are frustrated enough with recent developments - including a profit warning last month - to sell out at the price offered.

Retail's growing issue of rising wages and IT costs

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Citi Research just published its latest update for the retail industry in Australia and New Zealand, emphasising the growing issue of rising wages and IT costs. Citi sees both as crucial ingredients for successful retailing in today’s landscape, and expressed concern that both these cost buckets are starting to accelerate: “Navigating wage and IT costs will separate successful retailers”. We couldn’t agree more – in the past we commented repetitively about the danger of misdirected, excessive spending on IT in retail.

Bitcoin bubble burst

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Reuters reported that Bitcoin slumped on Tuesday to its lowest value this year (below U$4,327), tumbling as much as 10% and losing 25% of its value within a week.  It recovered slightly since, but it is worth noting that Bitcoin has plummeted over 75% this year from a peak of U$20,000 touched in December as retail "investors" piled into one of the largest bubbles in history.  We are not the only ones who have warned repetitively that gambling is not an investment.
20
Nov-18
Tuesday

Lidl US to acquire Best Market

209
Multiple media outlets reported that the US arm of German discount grocer Lidl will acquire 27 Best Market supermarkets in a deal that extends its market reach into metro New York. Lidl didn’t disclose a timetable for the conversion of the Best Market stores but said it plans to begin the remodeling, reinvestment and rebannering process next year. Lidl US’s expansion into a major market area like New York stands to turn up the competitive pressure that hard discount grocery chains — including fast-growing rival Aldi. It's worth noting that Lidl is owned by the same company as Kaufland, which is ramping up its operations Down Under.    

Baby Bunting gets the last laugh

191
The AFR reported that baby goods retailer Baby Bunting has tweaked its full-year profit guidance and expects earnings to rise at least 34% and as much as 45% in 2019, buoyed by a rebound in sales and margins following the collapse of four major rivals. The rebound in earnings follows a tough year in 2018, when the collapse of Toys 'R' Us and Babies 'R' Us, Bubs, Baby Savings and Baby Bounce led to massive industry-wide discounting and dented the retailer's gross margins, leading to a 19% fall in EBITDA to $18.6 million. Though, as we predicted in a previous post, Baby Bunting weathered the storm and is now getting the last laugh.