Retailing is turning into a war zone where even the cheapest and most efficient operators are being whacked by cautious consumers and the sluggish pace of demand in the economy.
As we told you a week ago in AirWeekly, the new battleground in business is between the banks hunting for local deposits from cautious Australian consumers and retailers who are trying to get us to spend more, especially in the run up to Christmas.
This also comes at a time when new jobs are being created at a record pace in some parts of the country, and yet retailing, the prime consumption sector, remains weak and unhappy. (See story above.)
The past week has confirmed that theory.
Take the shortfall on the fund raising by Westfield as part of the spin-off of its Australian retail malls.
The 41% shortfall from the $3.5 billion sought, was a major surprise.
And then the shock earnings downgrade from The Reject Shop yesterday which saw its shares pounded lower.
It joined the likes of Harvey Norman, Premier Investments (Just Jeans), Noni-B, JB Hi Fi and other chains warning of weak sales and/or lower profits.
Book chains like Angus and Robertson and Borders are also doing it tough as they battle ereaders and consumer caution.
But the downgrade from The Reject Shop (TRS) is a big warning signal that the slump is spreading down the retailing food chain.
After reporting comparable store sales growth of 4.2% from July to October, TRS growth has turned negative since the Reserve Bank increased rates last month. Annual profit is now expected to fall by up to 10%.
The retailer has always been one of the best run of the chains (low cost, good merchandising for its bottom of the market segment), so yesterday’s downgrade was completely unexpected.
The shares plunged by nearly 22% within minutes of that news being released, hitting a 12 month low of $12.72 in intra-day trading.
They closed at $13.50, down $3.59 and off more than 20% in an extreme reaction to the bad news, which the company said was caused by the RBA’s November rate rise.
But the sector had already seen a surprise 1.1% slide in sales in October, before the rate rise, according to last week’s figures from the Australian Bureau of Statistics.
TRS said in its statement to the ASX:
"The Reject Shop today announced a revision to its full year guidance following disappointing retail conditions since the November 2 interest rate rise announced by the Reserve Bank of Australia.
"Although the first half trading period has not yet ended, the Company expects first half profit will be significantly down on the corresponding half last year.
"As a result, the Company has revised down its full year NPAT expectations for FY2011 from the earlier $26 million to $26.5 million; to between $21 million and $22 million.
"Commenting on the impact, Managing Director Chris Bryce said, "As we noted at our Annual General Meeting in October we had been achieving our sales targets (with year to date comparable stores growth at 4.2%, above our targeted 3-4%).
"This was despite a strong element of price deflation over the past 12-18 months which has meant we have been selling more units to achieve the same retail dollars.
"However, since the last interest rate rise comparable store sales for November, and December to date, have been negative, resulting in overall sales being significantly below expectations.
"The drop in customer traffic and general customer spending since the interest rate rise was completely unexpected, however it is our understanding that overall customer traffic and spending is down across the retail sector.
"Sales in our seasonal ranges such as Christmas, seasonal food and gifts have been the most -impacted, which have been traditionally strong categories for us at this time of year. The unseasonally cool weather has also hampered sales in summer related merchandise.
"Notwithstanding the slow sales in seasonal ranges, our non seasonal offer remains solid with pleasing growth coming across many of our base categories. The success of our new store openings this half also provides confidence there is continued demand for our offer.
"We are therefore continuing to seek new sites in accordance with our planned strategy."
The Reject Shop posted a net profit of $23.4 million in the year to June 27, 2010.
The Reserve Bank recognises the impact of the consumer caution and higher levels of savings.
Its head of economics Phil Lowe told a Sydney dinner on Wednesday night that it was difficult to know whether there has been a long-lasting change in attitudes towards savings after two decades of rapid increases in household borrowing.
"There are a number of explanations for this increase in household savings in Australia, but it is likely that the most important is a rethinking of attitudes to debt and spending following the events in the global economy over the past few years.
"It would appear that many households now view high levels of debt and low rates of saving as more risky than they did previously.
"But the restraint being exhibited by the household sector is turning out to be quite long-lasting.
"In preparing our own forecasts, we have, for some time, been assuming that the household saving rate stays high for quite a while yet," he said.
"If this were to occur, not only would it lead to a lowering of risk in household balan
