Wooloworths’ profit downgrade suggests retail sales still weak for smaller players

Woolworths has downgraded its half year and full year earnings guidance for 2010-11 despite reporting a 3.8% rise in first half sales to $25.3 billion.

The retail giant says lower consumer confidence levels, inflation, interest rates and global economic conditions have weighed heavily on discretionary spending habits of customers, leading to the earnings downgrade.

According to the company, consumer confidence and spending levels are expected to remain low in the second half of the year as households continually struggle with inflation and interest rate rises.

Woolworths says the Queensland floods will also have an impact on sales, although it is still unclear as to what extent.

“Given the complexity of these insurance claims, a clear view of these costs could take many months to complete and will impact in the second half,” it says.

The results from the supermarket giant – which is seen as a bellwether for the wider retail sector – came after the latest Commonwealth Bank Business Sales Indicator showed business sales plateaued in December after falling for 12 consecutive months.

The BSI is obtained by tracking the value of credit and debit card transactions processed through CBA merchant facilities, covering spending across the economy rather than just retail sales.

According to CommSec economist Craig James, the December figures are the best reading for over a year.

“While growth in economy-wide spending remains elusive, the good news is that the majority of industry sectors are still expanding rather than contracting,” James says.

In trend terms, the value of spending transactions fell in only five out of 20 industries in December, down from eight sectors in November.

Retail stores, which represent the largest industry category, rose by 0.5% in December, recording its fourth consecutive gain.

The amusement and entertainment sector recorded its best reading in 14 months, with growth of 0.5%. This sector includes motion picture theatres, bowling alleys, golf courses and video stores.

Meanwhile, business services also recorded consistent growth for the past six months.

Across the industry sectors, the strongest gain was recorded by automobiles and vehicles, including service stations, car and boat dealers, and tyre and auto stores, with sales up by 0.9%.

Mail order and telephone order providers also recorded a 0.9% rise, with professional services and membership organisations up 0.7% and repair services up 0.6%.

The weakest sectors in December in trend terms were automobile and vehicle rentals, down by 1.2%, and miscellaneous stores, down by 0.8%.

Hotels and motels fell by 0.1% in December. The growth rate for this sector has consistently weakened over the past six months.

In annual terms, spending at personal service providers was up 6.9%, which includes laundries, hairdressers, shoe repair stores and tax agents.

This was followed by government services, up 4.4%, and professional services and membership organisations, up 4.3%.

The only states to record monthly trend growth in December were NSW, up 0.6%, followed by Western Australia, up 0.4%. According to the report, the NSW job market has strengthened in recent months, boosting business sales.

Spending was largely flat in the ACT and Tasmania, and fell the most in the Northern Territory and Victoria.

According to James, retailers will need to continue discounting in the near-term in order to sustain activity.

However, he says the figures “paint a much better picture” for business sales in the New Year.