Nearly $480 million has been wiped off the value of Australian retailers since the May budget was delivered, as the confession season produces a number of high-profile corporate downgrades and raises fears of more to come.
More than half a dozen retailers including Kathmandu Holdings, Pacific Brands, Super Retail Group, The Reject Shop, toy wholesaler Funtastic, footwear chain RCG Group and Noni B have downgraded earnings forecasts in the past month.
Most retailers have blamed unseasonally warm weather and a scary federal budget for consumers tightening their purse strings despite the appeal of historically low interest rates, which are supposed to make households feel better about spending.
"Discretionary retailing and media may struggle without further cuts to interest rates, while consumer staples appear overvalued," Morgan Stanley Wealth Management Australian head of strategy Malcolm Wood said.
The run up to the end of the financial year on June 30 is commonly referred to as the confession season as it is typically when companies reveal bad news about their profits ahead of the official August reporting season.
While the weakness in the retail sector hasn't been completely unexpected, some investors have punished certain stocks, including Funtastic which is down 48.3 per cent since the start of May, along with RCG Group, down 19.46 per cent and the Reject Shop, down 11.8 per cent and likely to be one of the worst performing stocks this financial year.
Consumer-focused companies have faced several headwinds in the financial year and many analysts are still anticipating further profit downgrades in the run-up to August with Myer, Premier Investments, Specialty Fashion Group considered most at risk.
"Consumers have been relatively cautious to date, and in combination with a late start to winter, we could also see some further downgrades across the consumer discretionary sector," JB Were chief investment officer James Wright said
Market sentiment has been heavily driven by a combination of a new Australian Liberal government elected in September and the budget deficit keeping a lid on fiscal spending.
TOUGH BOTH SIDES OF TASMAN
Shares in outdoor adventure gear retailer Kathmandu tumbled on Tuesday after the company became the latest retailer to downgrade its full-year profit guidance as a result of weaker-than-expected sales in Australia and New Zealand.
The company's share price is down about 9.5 per cent since the start of May.
JB Hi-Fi, which has seen its share price fall 5.98 per cent since May 1 to $18.13, reported negative sales growth, yet managed to maintain profit growth by cutting costs and controlling gross margins.
It also said it expected total sales for the year ending June 30 to rise 5.3 per cent, compared with a previous forecast for growth of between 6 per cent and 8 per cent.
Outside the retail sector, Treasury Wine Estates also confessed to $260 million worth of write-downs and impairments for 2013-14 on the value of its wine operations.
Other companies which have seen profit downgrades and their share prices decline since January this year including Ten Network Holdings, Southern Cross Media Group, and STW Communications.
Despite the weakness in consumer focuses sectors Credit Suisse research analyst Samantha Carleton laid the cards on the table earlier in the week by saying that good buying opportunities were opening up in the retail space, particularly those with strong brands, growth prospects, high yields and merger and acquisitions prospects.
She cited Oroton Group, Premier Investments, and Specialty Fashion Group as among the investment bank's top picks.