Covid 19 coronavirus profits: Was pandemic a blessing for NZX-listed retail companies?

Australasian clothing retailer Hallenstein Glasson is the latest retail company to post strong financial gains in the first half of the 2021 financial year,after a recent trend among NZX-listed retailers.

Last monthThe Warehouse Group announced a “record” first six months of trade, posting a $54.9 million net profit after tax, an increase of more than 83 per cent, while its sales revenue increased by 7.4 per cent to $1.8 billion.

Outdoor equipment retailer Kathmandu Holdings increased its sales by 13 per cent to $410.7m and posted a net profit of $22.3m, up 194 per cent in its first half, while homeware and sporting goods retailer Briscoe Group increased its net earnings by 17 per cent to $73.2m. Its sales revenue grew by 7.5 per cent to $701.8m.

More recently, Hallenstein Glasson announced a 13.6 per cent increase in sales to $181.9m in the six-month period, along with a 28.6 per cent increase to a net profit of $19.84m, up from $15.44m in the corresponding period a year earlier.

The men’s and women’s apparel retailer announced an interim dividend of 23 cents per share to be paid on April 16. The largest pay out in the period of any NZX-listed retailer. Briscoe Group declared a special dividend of 6 cents per share in December and The Warehouse declared a special dividend of 5 cents per share in February.

In the six months to December 27, Michael Hill International increased its net profit by 82.1 per cent to A$39m, up from $21.4m on the same period a year earlier. Its sales revenue declined almost 3 per cent to A$319m. All companies reported strong e-commerce growth.

Research analyst Ed Glennie, head of equity at Hobson Wealth, said retail companies had benefited from the coronavirus pandemic.

He put the bumper results down to “pent-up demand” and consumers wanting to spend money in the months after periods of lockdowns.

“I wouldn’t necessarily say it’s a bubble, but I think it has certainly helped profits over the last six months in the current earnings season,” Glennie told the Herald.

“Of listed New Zealand companies, many of them were undergoing change anyway. I think what you have seen with Covid, and not just across retail but all sorts of sectors, it has accelerated trends that were already happening,” said.

“The shift to online was happening anyway and for example, The Warehouse with their marketplace TheMarket were already doing that, but Covid certainly helped because you couldn’t go to the store. With the click and collect model, if you had that going before, then Covid has given that momentum. There was a period during restrictions where you had a drop off in sales but as for the recovery, those well-placed with online and e-commerce have really benefitted.”

The timing of Covid had benefited the listed companies thus far, but Glennie said it was unclear if strong earnings would continue through the second-half as there was still uncertainty ahead for the sector, including with continued supply chain delays and the potential for further lockdowns.

“In the listed space there a good, strong companies that have already been getting things in order and they benefitted from that pent up demand. It was combination of two that drove these strong results, I think,” he said.

“Certainly in a local New Zealand context, the likes of Briscoes, The Warehouse that are really tied into that New Zealand consumer, we do think that crossed out in how well they run those businesses, and we think that is something that can continue.”

Increased domestic spending, tied into continuing to rise house prices, was something that would likely continue in the near term, Glennie said.

Ultimately, however, he said the strong earnings were a result of efficiency and optimising productivity work put in by companies before the pandemic, in addition to being more focused on removing unnecessary costs.

Milford Asset Management senior analyst Frances Sweetman said across the sector most retailers had benefited from Covid as consumers refocused their spending from services to goods and the benefits of interest cost savings from a relatively stable local employment environment.

“The other thing that has benefited the profit performance of these businesses isreasonably high demand has meant that they haven’t had to run as many promotions or discounts. They have had better growth margins … and running at a lower cost structure which has allowed more of that improved sales performance to drop to the bottom line.”

Sweetman said “some of the wind was already coming out of the services to goods switch” and she did not expect strong earnings to continue.

“We’ve come out of lockdowns, able to go out and also potentially save up for travel spend next year with the prospect of borders reopening closer to what they were a year ago. Costs savings are also locked in now and there isn’t further room for improvement so I would suggest that profits won’t grow to the same extent going forward.”

Is it a good time to invest in retail companies?

The retail sector is less defensive and more unstable in nature compared to other sectors.It is fickle and generally harder to forecast returns.

“Retail companies in general have not been much loved by the sharemarket over the last five years, and for the most part are still trading at similar valuations to what they were pre-Covid. That said, there is a reasonable amount of uncertainty in the outlook still so [investors] need to look at each company on an individual basis and work out how strong its outlook is versus previous and whether that offers good value for money,” said Sweetman.

“Retailers have taken the opportunity to make improvements to their businesses, and they have benefited from a windfall of sales, but I would describe it as a more one-off than a fundamental structural change for the industry.”

Carolyn Holmes, head of research at Shareclarity, said she believed Covid-19 had ultimately been a blessing in disguise for retail companies.

Holmes warned strong retail earnings would not last and the pandemic-induced profit bubble would pop.

“The catalyst for [strong earnings] has been the diversion of travel expenditure, once the international borders reopen and people can actually start travelling again, you will find that [sales revenues will retreat].”

She expects reduced albeit normalised earnings will begin to flow through and be seen in company earnings in the second-half of FY22 and into FY23.

“While some people might like to believe that everything will continue on as though Covid has set a new base, [but] it just can’t be right … the $2000 that has gone into apparel will go back to going on a trip.”

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