Discounted fortunes

The big names behind the retail sector are feeling a chill wind from the cooling economy. By JAMES THOMSON

By James Thomson

The big names behind the retail sector are feeling a chill wind from the cooling economy.

Last week we looked at Australia’s hottest sector, coal seam gas. This week it’s time to look at the coldest – retail.

New data released by Westpac and the Melbourne Institute this week revealed consumer confidence has plummeted to a 16-year low as a result of higher fuel costs, rising interest rates, poor sharemarket returns and soaring food prices.

That’s more bad news for retailers, who have already seen sales slide in the first few months of the year.

But the retail slump isn’t just being felt on the shop floor. It’s also hitting some of our best-known retailers where it hurts most – the hip pocket.

Australia’s best-known retailer is Gerry Harvey, founder and major shareholder of whitegoods giant Harvey Norman. It’s been a horror year for Gerry and his business partner and fellow Harvey Norman director, Ian Norman. The value of Gerry’s shareholding has fallen a whopping 53%, or $1.1 billion, since the start of the year, from $2.1 billion to $990 million. Ian Norman’s stake is now worth $557 million, down from $1.2 billion at the start of the year.

Gerry Harvey’s first wife Lynette is probably feeling a bit pessimistic too. Harvey gave her a parcel of shares in their divorce settlement, but the value of her stake has shrunk from $339 million at the start of the year to just $159 million.

Harvey said in late May that the business was actually performing quite well, but negative sentiment towards the retail sector was weighing on Harvey Norman’s share price. Unfortunately for Gerry, investor sentiment is unlikely to turn around until well after consumer confidence picks up.

Super Cheap Auto founder Reg Rowe has also had a rough year, with shares in his car accessories and hardware chain down just over 37% since January. The value of Rowe’s holding has dropped by $84.4 million from $225.3 million to around $141 million.

The poor retail environment hasn’t dulled Super Cheap Auto’s appetite for growth – in mid May the company spent $6 million to buy Victoria bicycle retailer Goldcross Cycles. Given rising petrol prices, perhaps the company is hoping any customers they lose from their car accessories store will take up pedal power.

Billabong founder Gordon Merchant’s endless summer also appears over. Since the surfwear company listed in 2000 at $2 a share, the stock has climbed steadily, breaking through $17 in late 2007. But it’s been all downhill this year. The value of Merchant’s stake has fallen by almost $100 million since the start of the year to about $360 million.

A string of profit downgrades at the bottom end of the listed retail sector have also had a devastating impact on some investors.

Women’s clothing retailer Noni B, which is majority owned by the Kindl family, issued a profit downgrade on 21 May and has watched its shares slide about 10% since then. But the shares are now down more than 45% since the start of the year, slashing the value of the Kindl family’s stake from $49.8 million to around $26 million.

Telstra’s biggest mobile phone reseller, Fone Zone, recently changed its name to Vita Group. A change of fortunes is yet to follow. The company released a profit downgrade on 6 June and also announced a “realignment” of its Fone Zone chain – that’s code for closing down the useless stores.

Vita’s share price has sunk more than 46% since the start of the year to hover around 37c. That’s bad news for husband and wife team David McMahon and Maxine Horne, the founders and joint chief executives of the company. The value of their stake has shrunk from $35.6 million to just over $19 million.

There’s little doubt that the share prices of most companies in the retail sector will be under pressure for at least the next 12 months. But retail veterans understand this industry is cyclical. They will be prepared to ride out that downturn and will even look for cheap assets that others abandon – there’s no better example of this than Solomon Lew, who is currently bidding for Just Group via his investment vehicle Premier.

Retailers and retail investors need plenty of patience and a long-term outlook.

Read more about retailers and the mistakes of the rich

A version of this story appeared in Business Spectator