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					               Retail
Industry Roundup




   KordaMentha Research Unit
              Publication 611

                 August 2006
Industry Roundup
August 2006



                                        Retail

                                        Overview
                                        •     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
                                              quarter).
                                        •     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
                                              active.
                                        •     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.


Key Statistics
                                        •     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%
 50,000
                      35,532                        36,045              36,301              36,813                      37,436
 40,000
 30,000               7,634                         7,681                7,717              7,820                        7,952
                      7,487                         7,512                7,465              7,532                        7,601
 20,000
 10,000               20,411                        20,852              21,118              21,462                      21,883
      0
                       4Q05                         1Q06                 2Q06                   3Q06                      4Q06

Notes:                                                                                                 Source: Australian Bureau of Statistics.
1.   Trend Estimates
2.   Quarterly dated based on year ended 30 June.
Industry Roundup

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
 7,500
                                                      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
 7,200
         4Q05     1Q06    2Q06     3Q06    4Q06       not “on-trend”. Supply chain flexibility remains a critical success
                                                      factor for retailers.
Source: Australian Bureau of Statistics.
Notes:
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
                                                      Navis Capital.
                                                  •   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
                                                                           replacement.




                                                                                                                   Page 2
Industry Roundup

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
                                                             2006.

                                                             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
                                                             prior year).

                                                             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.




                                                                                                      Page 3
Industry Roundup

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).
 7,500
                                                 •   Domestic appliances and music contributed to the rise (6.4% PCP),
 7,300
                                                     driven mainly by sales of flat screen televisions.
 7,100
         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.




                                                                                                                    Page 4
Industry Roundup

Food Retailing

 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).
 22,000
                                                    •   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.
Notes:
1. Trend estimate.                                  •   Recent developments of key sector players are summarised below:
2. Quarterly data based on year ended 30
    June.
                                                                              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
                                                                              (21.6% growth).
                                                                              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
                                                                              based factory.

                                                                                                                       Page 5
Industry Roundup

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.




                                                                                         Page 6
Industry Roundup

Sector Outlook
                 •   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
                     tax cuts.
                 •   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
                     Independent Distillers.




                                                                                     Page 7
                       About The KordaMentha Research Unit

Background
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
    result.


Personnel
The KordaMentha Research Unit is headed by Andrew Malarkey (amalarkey@kordamentha.com).
All KordaMentha Partners and Directors contribute to the KordaMentha Research Unit.


Current Research
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

				
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