Streamlining inventory way to stay safe
NATIONAL: Trade remains buoyant despite the looming spectre of global recession, but fashion retailers should prepare for leaner times, according to commentators.
Following last year's US credit crunch and its impact on the wider economy, fears of a global recession and resulting stock market jitters could see a drop in discretionary spending as consumers tighten their belts, according to Hubb Financial analyst Andrew Page.
Page, whose company specialises in retail investment, said the impact was already being felt by Australian retailers.
"Examples of discretionary retail stocks include Just Group, Pacific Brands and David Jones. The discretionary sector that these stocks belong to has under-performed the general market by about 1.25 per cent since the beginning of January," he said.
Nevertheless strong corporate profits, high consumer confidence, low unemployment and economic forecasts of solid growth for the next 12 months negated any immediate threat of recession in Australia.
"The real issue at present is that things are going so well that inflation is a problem. The Reserve Bank of Australia (RBA) may increase interest rates to deal with this. If rates continue to rise, and if the economic fallout from the US starts to affect us here, then we could well see consumer spending slow, and that's going to impact retail earnings. This is why we've seen shares lose such value in recent sessions; investors are concerned over corporate profits."
The best long-term defence for retailers was to ensure their debt levels were "reasonable and serviceable", he said.
"Those best equipped to weather the storm will have reliable and consistent earnings with operations that are diversified to some degree. Retailers such as Woolworths that have a variety of revenue streams - including fashion - will be the safest."
Page said it was reasonable to expect the retail sector would experience a slight slow down. For most well run businesses this would mean a smaller profit - but a profit nonetheless.
"Those companies that are forced to carry a loss as a result of a drop in consumer spending will need enough cash reserves or a reasonable credit rating to ensure that they can maintain their operations until better times return."
Womenswear retailer Feathers claimed any effects of the US downturn on Australian retailers were likely to be felt later in the year.
"It's really too early to say what how retail will be affected. The stock market crashes only occurred a matter of weeks ago and consumer confidence does not appear dented. In fact our sales for January were up on the same period last year. We haven't felt any effect yet. I think the effects will only become evident over the coming months," said Feathers founder Margaret Porritt.
Meanwhile Steve Ogden-Barnes, program director at the Australian Centre for Retail Studies (ACRS), described the current outlook in Australia as "choppy waters, but not the storm predicted earlier this year."
"Retailers have had it good for a number of years, averaging five to eight per cent growth over the past three to five years. That can't continue forever and they will probably need to remodel their analysis for two to three per cent growth," he said.
"Wiser retailers should use this time to look at ways of reducing their operating costs, streamlining inventory and working on mark down optimisation. They would be well advised to invest profits in stock pricing and inventory management systems."
By Belinda Smart