LA Private

Writing on the wall for retail over-correction

Adairs (ASX:ADH) is the first major retailer to flag to investors the impact of the RBA-driven slowdown on its 2022-23 performance with a weak trading update on Friday that confirmed the slide in consumer spending is hurting retail sales and earnings.

Adairs’ warning won’t feature in tomorrow’s discussions in the Reserve Bank boardroom about whether another rate rise is justified and yet it should because it shows just how difficult retailers are finding conditions.

Australian Bureau of Statistics retail sales data for April showed no growth in the month and for the first time, consumers spent less on food at supermarkets etc for the first time in 13 months (and that previous occasion was when the terrible floods in northern NSW and parts of Queensland stopped consumers from spending).

Spending in cafes, on takeaways and in restaurants also fell – for the first time since November when consumers spent big on the so-called black Friday sales which buoyed the sector for just one month.

Consumers spent up on food and cafes etc in December when overall retail sales slumped 3.9% after November’s 1.4% rise (to an all-time high of more than $35.8 billion).

Since then, retail sales have fallen in nominal and real terms – April’s $35.26 billion was half a billion lower than in November, all due to the RBA’s rate rises.

The fall is greater in real terms with food price inflation running at 7.9% in the year to April, according to the monthly consumer price indicator from the ABS.

Eventually the cumulative impact of the rate rises and sluggish sales will force retailers to start laying off staff, giving the RBA a big win in its campaign to cut inflation.

Adairs’ update was far more definitive than the very belated warning last week from Wesfarmers CEO Rob Scott that “the honeymoon is very much over”. The slow slide in retail sales growth has been evident since January and yet it took five months for Scott to notice it.

Adairs told the market that trading conditions have deteriorated markedly since the end of the first half. So much so, that after sales growth of 34.1% for the first half (a post=pandemic boost), its group sales growth financial year to date is now just 1.9%.

This reflects second-half sales declines (over the prior corresponding period) of 3.4% for the Adairs business, 10.9% for its Focus on Furniture operation, and 23.8% for the troubled Mocka online business.

Management blamed this on the cost-of-living crisis being caused by rising interest rates.

In light of the above, Adairs said on Friday that it has downgraded its 2022-23 guidance:

Group sales for the year to June of $616 million to $622 million (down from $625 million to $665 million);Group EBIT of $62 million to $65 million (from $70 million to $80 million); andCapital expenditure of $12 million to $13 million (from $12 million to $15 million).
Adairs’ update was not just a ‘canary in a coal mine’ style alert, as some put it, but an enormous warning siren that Australia retailers are going to be ‘fessing up to a lot of nasty numbers in the next month or so about how terrible trading has become in recent months in the wake of the 11 rate rises from the Reserve Bank in the past year.