Retailers slash sales forecasts in spite of strong economy

While the economy seems to be thriving with rising house prices, strong manufacturing activity and high consumer confidence, retailers continue to struggle with major companies announcing disappointing results.

Supermarket giant Woolworths, electronic and white goods retailer Clive Peeters and discount furniture group Fantastic Furniture have all delivered less-than-stellar sales in the past week.

Woolworths firstly announced it would be reducing its sales forecast for the fourth quarter of the financial year, despite recording a 3.8% increase in the third quarter to $11.04 billion.

Yesterday, Fantastic Furniture also cut its guidance for full year net profit, now expecting a return of between $19 and $21 million, with the company’s shares falling 17.11% to $3.10. This morning, Clive Peeters announced expectations of a $4.5 million loss for the three months ending March 31, with shares falling a massive 32% to 14.5c.

Experts suggest the paradox of high housing prices and strong inflation with lower retail sales could be a symptom of home owners attempting to cut back on spending as they attempt to service their mortgages, with interest rates rising earlier than expected.

Russel Zimmerman, chief executive of the Australian Retailer’s Association, says the latest retail sales are liable to restricted consumer spending, even though confidence is high.

“Regarding the confidence issue, I think people are still a little bit scared about how high interest rates will actually go. People were also concerned about what might or might not have been in the tax review, and I think people aren’t just going to become immediately happy after a previously difficult 12 months.”

Zimmerman also suggests massive discounting could be affecting the industry, particularly hurting discount retailers. He says as high-end businesses discount items that were previously out of reach for many, these customers tend to favour those items over smaller retailers.

“Many lower-end retailers already offer things for quite cheap, and when they put something out on sale it’s not necessarily as good a value as something high-end that has been reduced in price.”

“We’re optimistic, we are always optimistic, but the budget is out next week and hopefully we’ll see a little opening of the purses there. It’s dependent on reserve bank rises, to be honest, and I think a lot of people haven’t taken those rate rises into account, which affects spending.”

But retail expert Phil Bonanno suggests the market isn’t that simple, and says the disappointing results of a few retailers shouldn’t be extrapolated to represent the entire industry.

“The message I get from retailers is that the market is pretty soft at the moment, but I would caution against looking at one or a couple of other operators and then determining that the market is heading entirely in that direction. I think it all comes back to supply and demand, to be honest, because there are some good results elsewhere in the market.”

“There’s also a competitive element to these results, there are good results elsewhere in those industries.”

Bonanno says for the last year, perhaps the retail market has been appearing more buoyant than it actually was due to the extra stimulus, and now the real representation of the industry is beginning to show.

“Additionally, purely from a customer psychology perspective, I think there is enough concern over interest rates that people are being a little frugal with some things, and I think that’s to be expected.”