Excitement, Anxiety around Australian Retail- Wesfarmers, Myer & Bapcor in Discussion

Owing to the unprecedented advent and enduring repercussions of the global invisible enemy, the novel coronavirus, Australia’s retail sector has seen significant structural change and disruption along with changes in consumer behaviour and competition associated with this disruption. Even though COVID-19 is primarily a health threat, it has severe ramifications for overall economic growth. And, retail activity is key to overall economic recovery.

Australian Retail Trend Amid COVID 19

According to the Australian Bureau of Statistics (ABS), the seasonally adjusted Australian retail turnover fell 17.9% in April 2020, marking the strongest seasonally adjusted fall ever published from the Retail Trade survey amid the COVID-19 crisis. This follows the strongest ever seasonally adjusted rise in March 2020 where it rose by 8.5%.

Director of Quarterly Economy Wide Surveys Ben James stated that the virus heavily impacted retail trade in March with unprecedented demand in food retailing (the strongest seen in the history of the series), household goods, and other retailing. On the bleak side, sales dropped in cafes, restaurants, takeaway food services owing to social distancing regulations (strongest fall in the history of the series). Discretionary spending in footwear, clothing, personal accessory retailing, as well as department stores was also shaky. In original terms, online retail turnover added 7.1% to total retail turnover in March 2020.

April saw food retailing business plummet by 17.1%. Overall retail impacts in the month were devastatingly negative, owing to social distancing measures limiting the competence of businesses to trade as it does ideally. So much so, turnover in footwear, clothing, and personal accessory retailing, along with cafes, takeaways and restaurants was just about half of the April 2019 level.

Australian Retail Current Stance

Towards the end of April, Australia witnessed an awaited fall in the number of Coronavirus cases, though, as experts opine, it will take time to resolve the situation completely even after new cases stop altogether. With vigilance, the Federal Government decided to consider gradual and slow lifting of lockdown, an earlier-than-expected end to a five-week shutdown, as PM Scott Morrison aspires the Australian economy to “snap back” to the way it was once COVID-19 is contained.

Thanks to the easing of restrictions in some states and territories, Australian retailers have started to reopen stores after few weeks of decimated overall sales but fast-tracked e-commerce expansion. This is being done with health and safety of staff and customers as the top priority, using strict hygiene rules, customer limits and social distancing inside outlets.

However, amid the excitement of stores reopening and normalcy (in the form of the “new normal”) returning, there is some anxiety about the retail sector picking up its lost momentum in the fear of an economic downturn and uncertainty about ‘second waves’ of the virus. An innovative transformation and rebirth of retailers is likely in the medium to long term along with ample opportunities, but not with the virus fear completely gone.

GOOD READ- Lateral Gains through Supermarket and Retail Stocks

In this backdrop, let us cast an eye over 3 popular ASX-listed retail stocks, and their stance amid the coronavirus fright-

Wesfarmers Limited (ASX:WES)- Target & Kmart Store Network Changes, FY20 Update

One of Australia's largest listed companies with a diverse business operation cover, WES is Target Australia’s parent company. The Company recently intimated about a closure of 10 to 25 large format Target stores and remaining 50 small format Target Country stores along with significant restructuring of the Target store support office.

Moreover, up to 92 Target stores are likely to be converted into Kmart outlets in the next 12 months, given WES’ enhanced investment in digital capabilities, sustained strong growth in online sales across the Kmart Group, satisfying progress in Catch since the 2019 acquisition.

Team members from Target that are planned to undergo a conversion to Kmart, will receive an employment offer from Kmart. Few will be gauged for new roles in Kmart as well as Catch as these businesses grow. The Company has also set up a cross-divisional working group to classify redeployment prospects.

Besides this, the following significant items are expected to be recognised by the Company in its FY20 results-

• Restructuring costs and provisions in Kmart Group of ~ $120 to $170 million before tax
• Non-cash impairment in Kmart Group of ~ $430 to $480 million before tax
• Non-cash impairment in the Industrial and Safety division of ~ $300 million before tax
• Pre-tax gain on sale of 10.1 per cent interest in Coles of $290 million, and one-off pre-tax gain of $221 million on the revaluation of the remaining Coles investment
• Kmart Group is also expected to incur one-off non-operating costs of ~ $120 to $140 million relating to the conversion of stores and stock clearance activity prior to closure or conversion in FY21

WES last quoted $38.86, down by 0.05% on 22 May 2020.

An interesting watch: https://kalkinemedia.com/au/video/company-wesfarmers-announced-up-to-167-stores-to-disappear-asx-market-update

Myer Holdings Limited (ASX:MYR)- Stores Reopen, Online Business Performs Well

An upmarket Australian department store chain, MYR had been closely monitoring government measures and advice with a view to reopening stores as soon as possible, on a staged and trial basis. MYR has also been taking all necessary measures to minimise costs and remains in dialogue with suppliers and landlords.

The Company has reopened 24 stores over the recent few weeks, considering government measures and conditions across the different states and territories. MYR also intimated that it witnessed a surge in online business, which continued to perform strongly amid the coronavirus crisis.

While Click and Collect services will be available at all stores nationally, from 27 May 2020, MYR will reopen all of its remaining stores excluding Karrinyup (WA), which is expected to reopen on 30 May 2020 post refurbishment works.

MYR ensures boosted frequency of cleaning, social distancing in place, provision of hand sanitiser stations and contactless payments to protect the health and welfare of consumers and team members.

MYR last quoted $0.29, up by 7.4% on 22 May 2020.

Bapcor Limited (ASX:BAP)- SPP Completion

Operating the end-to-end automotive aftermarket supply chain, car parts retailer BAP recently and successfully completed its share purchase plan (SPP) after a successful $180 million placement. Close to 12.8 million new shares will be issued under the SPP on 25 May 2020 and commence trading. Strong demand encouraged Directors to nearly double the amount on offer by $26 million to $56 million.

This capital raising is complementary to a range of cost saving initiatives implemented by BAP to preserve and manage cash flow amid the coronavirus crisis including store closures in New Zealand, cutting executive salaries, eradicating discretionary expenditure, and requesting landlords for rent relief.

BAP last quoted $5.66, down by 4.23% on 22 May 2020.

It is true that if retailers do not focus on the customer, they face an arduous battle to stay alive - much less prosper. The COVID 19 situation has given an additional responsibility to the retail sector, of taking care of health and safety while placing the customer at the heart of everything it does. With the gradual removal of constraints and reopening of businesses, it will be interesting to gauge the retail sector unfold the tricks of the trade and react to changes in consumer sentiment, principles, and conduct, and put in place new mechanisms in the “new normal” world.

(NOTE: Currency is reported in Australian Dollar unless stated otherwise)