Australian retailing: 'Race to the bottom'

Retailers hit fast-forward in a race to the bottom

THE unrelenting and deep discounting war being fought in the retail sector has notched up its second victim in a week, with Harvey Norman revealing its pre-tax profit slumped 44 per cent in the March quarter.

SMH,

May 4, 2012

Sales for the first nine months of this financial year have fallen nearly 7 per cent.

Only last week, rival electronics and entertainment retailer JB Hi-Fi - which released its own disappointing sales and profit forecast due to the double punch of price deflation and price competition - named Harvey Norman as one of the main culprits of the race to the bottom.

Yesterday, Harvey Norman said the technology category continued to be challenged by declining average selling prices, with global sales falling 6.7 per cent to $4.39 billion for the nine months to March 31.

Comparable-store sales, which take out the contribution of new stores, slipped 6.6 per cent.

Australia, the company's key region, led the decline, and showed a worsening trend through the nine months. First-quarter sales were down 2.9 per cent, but that accelerated to a 10.2 per cent fall in the second quarter, and sales in the third quarter were down 9.2 per cent.

Third-quarter, like-for-like sales were down 7.9 per cent in New Zealand, 5 per cent weaker in Slovenia-Croatia and 1.3 per cent stronger in Ireland.

The knock-on effect to pre-tax profit has been catastrophic. Harvey Norman said preliminary accounts for the nine months indicated pre-tax earnings of $204.8 million against $272.3 million the previous year. This would translate to a 43.9 per cent drop in earnings for the third quarter, or a 24.8 per cent fall for the nine months to March 31.

Shares in Harvey Norman, however, took the bad news in their stride, falling only 3¢ to close at $2.04.

The company said competitive activity had accelerated due in part to the recent collapse of WOW Sight and Sound and heavy price promotion triggered by the anticipated sale and part closure of Dick Smith.

Poor weather also hurt the seasonal category of electronic products.

Roger Montgomery of Montgomery Investment Management said price deflation across Harvey Norman's key entertainment categories was not the only issue facing the retailer.

''The store format is outdated and tired,'' he said. ''While it's true price deflation is a significant component in the most recent results, when the economy recovers will Harvey Norman recover with those that have led by example in terms of reinvigorating their brand and their offer? My fear is this is not cyclical as much as it is structural.''

Constellation Capital analyst Brian Han said Harvey Norman would be protected to some extent by the fact it owned its own properties as opposed to being locked into long-dated and expensive leases