New Zealand is coming off a period of strong growth, and will potentially lose a little steam over the coming year or two.
Most of the major listed retailers have reported their latest results over the last couple of weeks, and it is clear that the sector is still facing major challenges. Despite robust economic growth and headline retail sales figures that look quite healthy, almost all of those involved in the industry are doing it tough, to varying degrees.
There are six major retail companies listed on the NZX. The Warehouse and Briscoes are the biggest, by some margin. Kathmandu and Michael Hill are of a moderate size, Hallenstein Glasson is a little smaller, and these days Pumpkin Patch is a minnow in the early stages of a turnaround.
In the post-global financial crisis period, these six collectively had their best year in 2011, when they were benefiting from a sharp economic recovery. The country had just rebounded out of a recession and a collapse in interest rates was helping consumer sentiment.
The six generated revenue of $3.4 billion that year, and their aggregate net profit was more than $200 million. Since then, revenue has increased 38 per cent, but the collective net profit is 29 per cent lower.
Briscoes has managed to buck the trend quite substantially, seeing its bottom line grow more than 70 per cent and increasing its annual dividend by 55 per cent. The other five have all seen profits slip, while none have managed to deliver any dividend growth over that period.
Hallenstein Glasson has held its dividend steady, although this is looking unsustainable and a modest dividend cut this year is likely.
With that in mind, it's unsurprising to note that retailers have been a poor investment in recent years. With the exception of Briscoes, the other companies named have all lagged some way behind the broader market.
It's difficult to see this dynamic changing anytime soon either. New Zealand is coming off a period of strong growth, and will potentially lose a little steam over the coming year or two.
Unemployment has fallen steadily, migration has been driving population growth, rampant house prices have created a wealth effect for many people and sharply lower oil prices have boosted discretionary incomes.
If retailers haven't benefited from these factors in recent years, then they probably never will.
Looking at the common themes that have come through in the recent results, margins seem to be the pressure point for many.
Top line revenue growth actually looks decent, but there is clearly still a huge amount of competition in the sector, and some severe discounting is obviously taking place to move stock. The arrival of international heavyweights Zara and H&M this year won't make it any easier for the local apparel chains.
Online sales continue to eat into market share, a double-edged sword as those with more established online sales channels were seeing some of their best growth this way, albeit from a low base.
The weaker New Zealand dollar might be good for many of our exporters, but it makes life difficult for retailers who buy their stock overseas.
This was singled out by Hallenstein Glasson and The Warehouse as a key challenge, with any further slippage in the currency likely to push input costs up and squeeze margins further.
?Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on craigsip.com. This column is general in nature and should not be regarded as specific investment advice.