Specialty Fashion flags closure of 120 stores after downbeat sales report

Specialty Fashion Group, the company behind the La Senza, Katies and Miller’s chains, has announced a shock profit downgrade, along with the revelation that it may be forced to close over 100 stores if sales don’t improve.

Speciality Fashion shares fell 8% yesterday, after chief executive Gary Perlstein announced same store sales were down 4.5% during the first half of the year. Guidance for the first half of the year indicates earnings before interest, taxation, depreciation and amortisation may fall as much as 38% to $21-22 million.

The retailer announced a number of new initiatives to adapt to what it calls the “bricks and clicks” paradigm, saying it will transform its supply chain by rationalising its supplier base, among other initiatives, and increasing its customer service provisions.

It will also introduce a completely new online brand this year, and target a ratio of 15% for online sales in three years. At the moment, just 2% of sales are online.

But the biggest announcement was that sales and rents are so bad SFG may even need to close around 120 stores out of its 900-plus bricks and mortar locations, if current trading conditions continue and rents remain at current levels.

Those stores will be consolidated over a three-year period.

“The number of stores closed or recalibrated in size will depend on whether the rental costs decrease in line with the cost structure associated with running an online business,” it said.

“The company expects that if the current trading conditions continue, and rentals remain at their current levels, around 120 stores in the current portfolio will be rationalised over the next three years.”

SFG’s announcement is only the latest disappointment in a string of profit downgrades and flat sales results from companies including Just Group, JB Hi-Fi and Myer, with several more smaller retailers indicating they’ll have to think about shutting up shop altogether.

“There is certainly a business cycle in these things, such as nervousness among consumers about what will happen next. But the overwhelming factor here is the rise of online shopping,” says Forrester Research senior analyst, Steven Noble.

“Online shopping is without a doubt making it harder for traditional in-store retailers,” Noble says, adding that while this trend has been underway for awhile, “it’s particularly acute at the moment”.

The trend indicates retail is undergoing a shift wherein more bricks and mortar stores will close, and won’t be replaced. Instead, those jobs will move online – but it’s a slow move.

“Naturally you would expect that downward pressure on traditional in-store retail jobs, while creating new online jobs.”

However, Noble concedes those jobs may be slower to appear. “But there are benefits,” he says.

“New jobs are easier to locate, they don’t have to be spread around Australia. But certainly new jobs require certain skill sets, and it’s still a challenge to recruit senior people for online retail jobs.”

Russel Zimmerman, chief executive of the Australian Retailers Association, agrees a structural change is occurring, but believes SFG’s announcement is more to do with landlords.

“If you look at every store, with about a 2.5 employee per store average, if they go down that’s a lot of jobs.”

“At this stage, we’re not seeing a lot of realism from landlords. I know a good amount of retailers out there that have a reasonable number of stores on hold at the moment, and landlords need to get realistic about what’s happening.”

However, Zimmerman says businesses also need to think about how they are going to sell as the way business is done fundamentally changes.

“The very nature of rents and online growth will cause retailers to rethink their strategies. Some larger retailers are telling me they’re doing as well on their online sales as they do for their best bricks and mortar store, so why wouldn’t you be looking at doing it?”