KordaMentha Research Unit
• June 2006 quarter retail sector turnover increased by 1.7% from March and
5.4% from the prior comparable period to $37.4 billion. The growth in
turnover indicates consumer resilience in the face of high petrol prices and
rising interest rates.
• The strong labour market, income growth and anticipation of tax cuts (in July
2006) appear to also have supported consumer spending.
• Headline CPI rose by 1.6% for the quarter to 4.0% driven mainly by higher
petrol prices and banana prices. However, price deflation continues in
certain sectors, particularly that of women’s wear (down 1.4% from March
• Despite the increase in retail activity, the June 2006 Westpac-Melbourne
Institute Survey of Consumer Sentiment Index fell by 0.5% (to 103.8) which
may in part reflect contradictory messages received by consumers as to the
state of the economy (resulting in uncertainty).
• A number of discretionary retail sectors are coming under turnover and
margin pressure, including the clothing and technology sectors.
• Industry consolidation continues apace with private equity players remaining
• The interest rate rise in August (up 25 basis points) and the potential for a
further rate rise (as early as in November) are expected to negatively impact
on the retail sector outlook.
• June quarter retail sector turnover increased by 1.7% from March and 5.4%
from the prior comparable period (“PCP”) to $37.4 billion. The growth is
mainly attributable to strong underlying domestic demand and income
growth supported by anticipated tax cuts and low unemployment.
• The growth in turnover principally relates to the Food Retailing sector (up
2.0% from March quarter) and the Household Goods sector (up 1.7%).
Retail Turnover By Sector ($ million) (1)
Turnover ($ m) Food Clothing and Soft Goods Household Goods
1.4% 0.7% 1.4% 1.7%
35,532 36,045 36,301 36,813 37,436
30,000 7,634 7,681 7,717 7,820 7,952
7,487 7,512 7,465 7,532 7,601
10,000 20,411 20,852 21,118 21,462 21,883
4Q05 1Q06 2Q06 3Q06 4Q06
Notes: Source: Australian Bureau of Statistics.
1. Trend Estimates
2. Quarterly dated based on year ended 30 June.
Clothing and Soft Goods Retailing
Clothing and Soft Goods Retailing (A$ million) • June quarter sector turnover recorded a sound 0.9% quarterly
7,650 increase and 1.5% PCP increase to $7.6 billion due mainly to
continued retailer discounting and an increase in discretionary
expenditure in anticipation of tax cuts (effective in July).
7,350 • As mentioned in our previous quarter roundup, sector competition
remains strong with heavy discounting required to sell stock that is
4Q05 1Q06 2Q06 3Q06 4Q06 not “on-trend”. Supply chain flexibility remains a critical success
factor for retailers.
Source: Australian Bureau of Statistics.
1. Trend estimates.
• Price deflation continues, particularly that of women’s wear due in
2. Quarterly data based on year ended 30 part to offshore sourcing of products (particularly from China), with
June. prices on average declining by 1.4% for the quarter.
• Private equity players remain active in the sector with the proposed
takeover of Colorado Group by Affinity Equity Partners (for $430
million), the acquisition of Witchery by Gresham Private Equity (for
$130 million) and the acquisition of a 90% stake in Wendy’s by
• Recent developments of key sector players are summarised below:
Oroton Group provided a trading update for
FY06 noting a disappointing result for 2H06
that is below expectations and prior year.
The company cited significant discounting
activity of competitors and weaker than
expected sales for most brands. The
company’s FY06 EBIT guidance of between
$5.0 and $6.0 million compares to $7.8
million in the prior year.
The company separately announced a
strategic review to encompass an assessment
of the value of the company’s brand portfolio.
Colorado Group has advised shareholders to
reject the hostile takeover bid by Affinity
Equity Partners (of $4.50 per share, valuing
the company at approximately $430 million).
The company simultaneously announced the
resignation of Chief Operating Officer and
Acting CEO, Eddie MacDonald on 5 July
2006 and the appointment of Mel Sutton (ex
Foster’s Group and Globe International) as his
Clothing and Soft Goods Retailing (cont’d)
Just Group announced the resignation of
Howard McDonald as managing director and
the subsequent appointment of Jason Murray
(ex McKinsey & Co) effective September
David Jones upgraded its 2H06 net profit
guidance to $33 million (from $31 million),
citing better than expected 4Q06 sales
performance. FY06 net profit guidance is
now between $92 million and $94 million,
which represent an increase of between 18%
and 21% from prior year.
The company reiterated its 5% to 10% net
profit growth guidance in FY07 and FY08.
The company will open three new stores by
2008, which are expected to contribute $180
million in sales within three years.
Brazin announced it is undertaking a strategic
review of its corporate structure and may seek
to divest non-core businesses.
The company provided FY06 net profit
guidance at ~$10.7 million (consistent with
Following a winter clearance sale, Myer
launched a further sale (in July) to clear $150
million in redundant stock, forcing David
Jones to join a new round of discounting and
signalling potential further margin pressure
for smaller discretionary retailers.
Myer has closed 22 warehouses as part of its
strategy to streamline cost structure.
Pacific Brands announced the bolt-on
acquisition of the Peri business (a designer
and distributor of bed linen), to strengthen its
position in the bed linen market.
Source: Company reports and media.
Household Goods Retailing
Household Goods Retailing (A$ million) • June quarter sector turnover increased by 1.7% from March quarter
8,100 and 4.2% PCP to $8.0 billion mainly due to higher expenditure as a
7,900 result of the Soccer World Cup and the rise in building approvals (up
7,700 5.6% PCP).
• Domestic appliances and music contributed to the rise (6.4% PCP),
driven mainly by sales of flat screen televisions.
4Q05 1Q06 2Q06 3Q06 4Q06 • Recent developments of key sector players are summarised below:
Source: Australian Bureau of Statistics.
Notes: Harvey Norman reported a 7.0% PCP
1. Trend estimate.
2. Quarterly data based on year ended
increase in FY06 sales to $4.6 billion. The
30 June. company attributed the growth in part to
strong demand (especially during the Soccer
World Cup) for flat panel televisions.
JB Hi-Fi announced FY06 sales guidance at
$950 million driven in part by uplift in 2H06
consumer sentiment and strong sales
performance of the gaming segment with the
launch of the X-Box 360. The Playstation 3
launch in November 2006 is expected to
strengthen to FY07 sales.
Strathfield Group announced EBITDA
guidance for the six months ended June 2006
of between $0.01 million and $0.5 million.
This compares to a PCP loss of $11.3 million.
Directors, Warwick Mirzikinian and George
Cheihk have agreed to provide the company
with a $3.1 million working capital note
facility for an initial term of six months.
Mirzikinian will receive ten options for every
$1 of the facility made available every six
months (~4.5% of total issued capital in the
first 6 months). The company says the facility
serves to minimise the group’s cost of funding
and is also available to investors.
Source: Company reports and media.
Food Retailing (A$ million) • June quarter sector turnover increased by 2.0% from March and
24,000 7.2% PCP due in part to the rising cost of fresh fruit (in particular
that of bananas as the result of Cyclone Larry).
• RBA expects inflationary pressure from high fruit prices to continue
20,000 over the short-term (to mid-2007).
18,000 • Supermarket retailers are continuing to focus on private-label
4Q05 1Q06 2Q06 3Q06 4Q06 products, significantly increasing competition amongst suppliers for
Source: Australian Bureau of Statistics. available shelf space.
1. Trend estimate. • Recent developments of key sector players are summarised below:
2. Quarterly data based on year ended 30
Woolworths reported full year sales from
continuing operations of $37.6 billion
representing a 20.4% PCP increase.
The growth is mainly attributable to the
supermarket division (comparable sales
growth of 3.7%) and the petrol division
The company has maintained FY06 earnings
guidance at an increase in NPAT (excluding
Foodland and Taverner) of between 10% and
15%. Foodland and Taverner are expected to
add 5% to 8% to the result.
Broker analysts have revised down their
earnings per share forecasts to between 85.6c
and 88.7c amid lower than expected sales
growth in food and liquor in New Zealand.
Metcash reported a 19.5% increase in FY06
EBITDA to $226.9 million. The company
also provided FY06 EPS guidance in the
range of 22.5 to 25 cents (pre restructuring
costs but post amortisation).
The company reiterated FY06 EBIT
contribution from the Foodland Associated
Australia acquisition at between $80 and $90
million (before restructuring costs).
Golden Circle has entered into an agreement
to sell its baby food business to Royal
Numico (Netherland based) for $22 million.
Pursuant to the agreement, Numico will
market and sell the Golden Circle baby food
range under a brand license arrangement.
Golden Circle will continue to manufacture
and distribute the range from its Brisbane
Food Retailing (cont’d)
Coles maintained FY06 earnings guidance of
$785 million (excluding impact of the Myer
sale – the profit on sale of Myer is estimated
at $600 million.)
The company announced a new business
model; the company will be renamed Coles
Group, will reduce the number of focus
brands (Target and Officeworks) and will
develop a new integrated business model
comprising food, liquor, fuel and general
merchandise, under a single Coles brand.
The announcement of the new business model
followed an internal review that found Coles
had 30% more administrative staff than Tesco
(UK based comparable retailer). Net capital
expenditure to implement the new business
model is projected at $1.2 billion in FY07.
The transition to the new business model will
be headed up by Tim Hammon.
The company separately announced the
finalisation of the Hedley Hotel Group
acquisition (for ~$328 million), which is
aimed at increasing the company’s share of
the Queensland liquor and hotel market.
San Miguel is considering exit options in
relation to its 49% stake in the entity
comprising of National Foods and Berri
businesses. Berri reported significantly lower
profits for FY05 (year ended 31 December) of
$2.6 million, which was attributed to costs
associated with its legal dispute with ACI
Packaging (in the last three months of FY05)
and costs in relation to the National Foods
merger. According to press reports, should
San Miguel pursue an IPO exit pathway,
the float may be valued at ~$1.2 billion
making it one of the largest IPOs in 2006.
Source: Company reports and media.
• Overall retail sector turnover outlook is expected to remain stagnant
(or decline) as continued economic strength (RBA projected growth
of 3.5%), positive labour market conditions and tax cuts are balanced
against high petrol prices, the rise in interest rates (in August) and
the prospect of a further rate rise (as early as in November).
• Access Economics however is forecasting overall retail industry
sales growth of ~4.0% for FY07 (from 2.4% in FY06), citing higher
incomes (boosted by the resource boom), business investment and
• Despite the improvement in consumer sentiment in July (up 3.5%
from June to 107.4), the rise in interest rates (and the potential for a
further near-term rate rise) is expected to dampen consumer
confidence and discretionary expenditure.
• Food sector turnover is expected to maintain modest growth, mainly
due to rising prices of fresh fruit, the staple nature of products and
underlying economic growth. RBA expects inflationary pressure
from high fruit prices to continue over the short-term (to mid-2007).
• Clothing and Soft Goods sector outlook is expected to decline as
rising interest rates and high petrol prices offset benefits of income
tax cuts, leading to further pressure on discretionary spend. Price
deflation, in particular that of women’s wear, is expected to continue.
• Household Goods sector turnover is expected to achieve moderate
growth in the short-term due to higher building approvals. The
medium-term sector outlook is however likely to be negatively
impacted by rising interest rates.
• Industry consolidation is expected as subscale retailers continue to be
marginalised by “category killers”. The trend over the past 12
months suggests private equity players are likely to remain a key
driver of consolidation. Recent private equity transactions include
the acquisitions of Myer, Godfreys, Kathmandu and Manassen
Foods, the current takeover of Colorado Group and potential sale of
About The KordaMentha Research Unit
KordaMentha partners undertook the first voluntary administration in Australia, the largest voluntary
administration in Australia (Ansett with 42 companies, 15,000 employees and >$1 billion assets) and
the largest group of voluntary administrations in Australia (Stockford with 84 companies).
The strength of the KordaMentha experiences and our expertise makes us well placed to monitor and
evaluate issues and developments in the insolvency industry and to recommend changes.
Statement of Direction
The KordaMentha Research Unit aims to:
• Develop intellectual property
• Share our knowledge of specialist topics with insolvency stakeholders
• Develop balanced solutions for issues in the industry. We will do this by preparing position papers
on topics of interest, and encouraging discussion with a view that changes to the industry will
The KordaMentha Research Unit is headed by Andrew Malarkey (email@example.com).
All KordaMentha Partners and Directors contribute to the KordaMentha Research Unit.
The KordaMentha Research Unit has conducted research in a number of areas, including:
• 611: Industry Roundup – Retail August 2006
• 610: Industry Roundup – Agribusiness July 2006
• 609: Industry Roundup – Agribusiness June 2006
• 608: Industry Roundup – Agribusiness May 2006
• 607: Industry Roundup – Retail June 2006
• 606: Industry Vitals – Retail Pharmacy June 2006
• 605: Industry Roundup – Agribusiness April 2006
• 604: Industry Roundup – Retail March 2006
• 603: Industry Roundup – Agribusiness March 2006
• 602: Industry Roundup – Agribusiness February 2006
• 601: Industry Roundup – Agribusiness January 2006
• 506: Industry Roundup – Agribusiness December 2005
• 505: Industry Vitals – Transport Industry
• 504: Industry Vitals - Clothing Wholesalers
• 503: Shareholder Claims – Shareholders want some of the credit
• 502: Property Investment Due Diligence and Risk Management
• 501: Industry Vitals – Wine Industry
These and earlier papers can be accessed via the KordaMentha website – www.kordamentha.com