The retail stock most likely to go bust

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Amazon’s official launch is imminent. With the world’s biggest Ecommerce company potentially days away from taking market share, we asked a panel of Livewire contributors who is most likely to go bust, and what the key drivers of valuation have been.

Performance is a combination of local factors and the Amazon-effect

Shane Fitzgerald, Monash Investors 

There is little doubt that both Amazon and local factors have been weighing down on the retailers.

The market hates uncertainty and the launch of Amazon into Australia has created a great deal of uncertainty. This, in turn, has seen a valuation derating. Likewise, the weak consumer has pressured like for like sale growth and seen some earnings downgrades. 

On balance, we would say that Amazon has had the greatest impact, predominately due to the fact that its presence will have an ongoing impact on the retail sector, whereas the consumer will recover at some point. 

Opinion varies significantly on the likely success that Amazon’s launch into Australia will have.  Regardless, it will accelerate the existing trend of increased online purchasing of retail products. This, in turn, requires retailers to adapt to this new reality of dealing with customers. 

As in all things, some will do this well and others poorly. 

Department stores are in trouble

Roger Montgomery, Montgomery Investment Management

There is no question that the anticipation of Amazon’s arrival has had an effect on sentiment.  This is reflected in the fact that share price losses for companies like JB Hi-Fi have coincided with record sales and profits for the same businesses. Amazon’s impact on retailers will vary depending on the proportion of revenue derived from those segments that Amazon targets – higher value items under 25 kilograms.  Some retailers will go under, some will have to reinvent their offering and others will prosper. 

Overall, however, investors should keep in mind that even if Amazon grabs A$5B of annual sales, which would amount to a quarter of all online sales in Australia, it still is less than two per cent of total retail sales in Australia and less than 2.5 per cent of retail sales, ex Coles and Woolworths. So bricks & mortar retailing will not die completely. 

A bigger issue for retailers will, however, be the extent to which the slow down in high rise apartment construction approvals impacts on the levels of employment in the construction industry, which is the third largest employer in Australia. 

Approvals of apartment buildings greater than four storeys are off 40 per cent from the highs and less work combined with record household debt could have a negative influence on consumption, and in turn, employment on the retail sector, which is Australia’s second largest employer.

Who will go under?

In terms of which retailer is going into administration or liquidation, we would just say that department stores, and any other retailer whose strategy is dependent on price and range, are the ones most at risk.  

Amazon will have an impact on existing retailers of:

  • cosmetics 
  • sporting goods 
  • kitchen appliances 
  • electronics 
  • toys
  • clothes and
  • technology under 25 kilograms through Amazon Marketplace.

The extent of the impact, however, will depend on each retailer’s response to the perceived and actual threat. Some retailers will turn inwards and seek to compete head-on. This will be a challenge for any retailer only competing on price and range. Clearly, Amazon’s prices will be keener and the range broader. 

Mediocre service and high prices won’t cut it

Alex Shevelev, Forager Funds

Amazon has hampered expectations for sales and margins across the retail sector. Lower consumer spending hasn’t helped. Both are important to retail stocks, but in different ways. Lower consumer spending is largely cyclical. There will be a time when consumer spending grows strongly, though it might take a while.

The emergence of Amazon is different. Amazon, a scaled-up version of the shift to online shopping that we have been experiencing for years, is structural. If Amazon is successful here, and it looks like it will be, it is not going anywhere. And that means permanently lower prices.

Offering mediocre service and charging high prices isn’t going to cut it. Improving the customer experience might be costly, but it will be necessary to keep consumers shopping offline. Retailers will have to adjust. Many won’t be able, or willing, to change.

Among the sector, we think Godfreys (GFY) has the highest risk of going into administration. The company has been selling vacuum cleaners since the 1930s. Co-founder John Johnston sold the business to private equity in 2006 and bought it back five years later for one-third the price. Investors should have been cautious when the business was then floated in 2014.

Listed at $2.75, investors have now lost more than 80% of their money. That might not be all they lose. The last few years have not been kind to the retailer. Godfreys is onto its third fourth chief executive (another change was announced between writing and publication). Sales are falling; vacuum cleaners are not exactly an exciting in-person purchase. Net debt was last reported at $16.5m. The business has turned to selling its corporate stores to franchisees, generating one-off profits.

It wouldn’t be the first 1930s era retailer to falter this year. Luxury handbag retailer Oroton (ORL) was put into administration just last week. Like Oroton, the Godfreys brand and stores may well survive. But current shareholders may not be around to enjoy a rebirth.

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