Struggling Retail Market Conditions, A Look At WOW, MTS

Australian Retail Sector

Declared as “clearly in recession” in the recent ‘NAB Monthly Business Survey’ released by the National Australia Bank (ASX: NAB), the condition of the Australian retail sector has deteriorated in the past few months. As per the retail turnover data released by the Australian Bureau of Statistics for April 2019, the retail sales fell 0.1 per cent in seasonally adjusted terms against the expectation of a 0.2 per cent rise in April. The fall in retail sales was driven by sharp falls in Queensland and New South Wales. However, in trend terms, the retail sales improved by 0.2 per cent in April 2019, following a rise of 0.2 per cent in March 2019.

According to one of the Big Four professional services firms of Australia, the real retail turnover growth is anticipated to fall from 2.2 per cent in 2018 to just 1.5 per cent in 2019, before recovering again in 2020 to 2.9 per cent. The firm has provided its outlook for 2019 in two halves, with the first half constrained by weak income growth and the second half to receive a boost for the first time in over a decade from joint forces of monetary and fiscal stimulus.

Why Retail Sector is Struggling?

Many factors have contributed to the deterioration of the Australian retail sector in the past few months, including falling house prices, weak consumption, inflation below the target range and a deteriorating labor market. The Australian economy has also been struggling with weak employment growth and declining wealth in the past. The Reserve Bank of Australia (RBA) downgraded its forecast for the dwelling investment levels, economic growth, inflation and near-term consumption in May this year in the wake of falling housing prices and weak household incomes.

The unemployment rate in Australia increased in April to 5.2 per cent, convincing the RBA to cut the interest rates by 25 basis points in June. NAB has anticipated a further interest rate cut in November 2019 on the judgment that the economy is losing momentum.

Australian Retailers Listed on ASX

Let us have a look at two of the well-known Australian retailers, Woolworths Group Limited (ASX: WOW) and Metcash Limited (ASX: MTS) in some detail:

A supermarket company headquartered in Australia, Woolworths Group Limited (ASX:WOW) was founded in 1924. The company has grown into a diverse group of New Zealand and Australian retail businesses with some of the most trusted and recognised brands like BIG W, Woolworths, BWS, Dan Murphy’s and Countdown.

Why Woolworths Is In News Nowadays?

Woolworths has announced a partnership with a UK-based technology company, Spoon Guru recently. Under the partnership, Spoon Guru will provide its world-leading and unique dietary preference platform to Woolworths in Australia and New Zealand. Spoon Guru’s AI-led technology helps consumers find foods based on their dietary preferences quickly and easily when shopping online. Woolworths will be integrating the Spoon Guru’s ground-breaking technology solution into its digital shopping platforms.

Mr Ananth Sarathy, general manager for digital experience, Woolworths informed that it was the first Australian retailer to partner with Spoon Guru.

Woolworths launched the Spoon Guru’s technology on its site last month and has received a positive response from its customers initially. Mr Sarathy informed that many shoppers are using the feature to create lists for shopping in store as well as online.

Operational Update

On 7^th June 2019, Woolworths Group announced a strategic partnership with a leading meal kit delivery company, Marley Spoon AG (ASX: MMM). The partnership called for an investment of AUD 30 million by Woolworths Group in Marley Spoon, via the issue of Marley Spoon shares (AUD 7 million) and a senior secured convertible note (AUD 23 million).

The company released its third quarter sales results on 2^nd May 2019. The sales of the company improved in Q3 across different segments, as indicated in the figure below:

In April this year, the company informed about the successful completion of the sale of its Petrol business to EG Group. The company also declared a $1.7 billion off-market buy-back for returning the proceeds from the Woolworths Petrol sale to shareholders.

Financial Performance

The company published its financial results for the half-year ending 30^th December 2018 in February 2019. The company’s financial results demonstrated modest sales and profit growth in H1 F19. The sales from continuing operations rose 2.3 per cent to $30,587 million in H1 F19 relative to the prior corresponding period. The company reported the EBIT of $1,445 million (up 1 per cent on pcp).

Future Outlook

Woolworths Group mentioned the following expectations for its company in FY19 in the third quarter sales update:

• Endeavour Drinks’ EBIT is expected to stay below the prior year’s figure in FY19 as the company is investing in improving its range, service and convenience for its customers.
• BIG W is likely to post a loss before interest and tax of 80-100 million dollars in YF19.

Stock Performance

The company’s stock closed lower on the ASX today at AUD 32.990, down by 0.39 per cent relative to the last closed price. Around 4.15 million shares were in trade today. The stock’s 52-week high and low value was recorded at AUD 34.84 and AUD 27.03, respectively. WOW has generated a return of 23.68 per cent since it started trading on the Australian Stock Exchange.

Metcash Limited

A leading wholesale distribution and marketing company of Australia, Metcash Limited (ASX:MTS) is dedicated to delivering the best level of service to its independent retail and wholesale customers across different sectors like Food, Liquor and Hardware. The company has distribution centres in each of the major cities of Australia, serving more than 10,000 retail customers.

Operational Performance

On 3^rd June 2019, the company informed about its supply agreements with Drakes Supermarkets in an announcement on ASX. Metcash signed a five-year supply deal with Drakes Supermarkets in Queensland, following the expiry of its existing supply deal on 2^nd June 2019. Metcash mentioned that it would also o supply its Foodland supermarkets in South Australia till 30^th September, providing an option to Drakes Supermarkets for extending the agreement to 30 September 2020.

In February 2019, eCargo Holdings Limited (ASX:ECG) successfully acquired 85 per cent of the Metcash’s China Business, Metcash Export Services Pty Limited, with Metcash retaining 15 per cent.

Financial Performance

Metcash reported its financial results for the half year ending 31^st October 2018 on 3^rd December 2018. The company’s Reported Group revenue improved 2.2 per cent to $6.2 billion during the period relative to the 1H18 figure. The Underlying profit after tax also rose 1.2 per cent to $100.3 million, with Statutory profit after tax increasing 3 per cent to $95.8 million.

Stock Performance

The company’s stock closed flat at AUD 3.150 with 3.9 million shares in trade today. The stock opened at AUD 3.17, fluctuating between a high and low value of AUD 3.19 and AUD 3.12 during the intraday session. The market capitalisation of MTS was recorded at AUD 2.86 billion at the time of writing the report. The stock has performed fairly well in the past, generating a return of 32.35 per cent on a YTD basis.

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