EXCLUSIVE: One of the worlds leading investment banks Merrill Lynch is forecasting tough times ahead for the Australian consumer technology industry in particular for retailers like JB Hi Fi, Harvey Norman and David Jones who they say will be hit hard.
In a confidential report to customers the investment bank have downgraded both JB Hi Fi and David Jones from Neutral to “underperform”. They have not commented on Harvey Norman who on a performance basis is significantly lagging behind the performance of JB Hi Fi and David Jones.
Over 5 years JB Hi Fi has returned 479% growth while Harvey Norman has only returned 4.38%. David Jones has returned 120% .
Merrill Lynch claim that David Jones’ earnings will fall by 7%, in FY10E and FY11E and JB Hi Fi earnings will fall by 3% in FY10E and 4% in FY11E.
They also claim that despite having a positive view on David Jones and JB Hi Fi’s management, industry positions and strong business models, we believe they have a very tough 12 months to get through with economic conditions in Australia likely to deteriorate.
They stated “We believe that there is too much complacency toward potential poor economic conditions in Australia – highlighted by the recent out performance of the discretionary stocks in the last few months.”
Silvia Spadea and David Errington, analysts at Merrill Lynch, also wrote “We believe that there is a high level of complacency broadly in Australia toward the economic conditions that potentially lay ahead. Australia has been insulated or shielded from probably the worst global financial crisis in 75 years through extremely aggressive central actions directed solely toward the consumer, which look unsustainable and extremely costly to future consumers”.
They went on to say “The retailers are benefiting enormously at present, and FY09 earnings are likely to be strong. However, the concern is what will happen when the stimulus packages run off and retailers have to cycle current conditions at a time when unemployment is expected to rise significantly”.
They believe that FY10 will be a year of heavy disappointment, as economic conditions in Australia are “likely to be at their worst” and that a consumer crunch will hit in early CY2010.
They said “We expect 1HCY2010 to be a very difficult time for discretionary retailers in Australia and based on the experiences of the retailers in the US, the impact to earnings from a downturn could be very severe. Retailers with highest operating leverage will suffer most”.
“The US experience to date has seen most discretionary retailers’ earnings significantly impacted by sales de-leverage. In fact, US department stores on average experienced a 35% decline in earnings from an 8% decline in comp sales growth. And given Australia is lagging the global downturn by around 9-12 months, this could soon be a reality for some”.