KMD Brands' sales slumped in the first half. Photo / Jason Oxenham
The current anaemic state of the New Zealand economy may yet prove a boost for a struggling sharemarket.
At the coalface, results from Kathmandu and The Warehouse this week highlighted just how weak consumer sentiment is right now.
KMD Brands, with extensive retail stores in Australia and New Zealand, said its underlying earnings before interest, tax, depreciation and amortisation (Ebitda) came to $15.1 million, down 66.8 per cent year-on-year due to lower sales.
Group chief executive and managing director Michael Daly said the company continued to experience the effects of weakness in consumer sentiment. Sales were 14.5 per cent below last year’s record result; and decreased for all three of its brands.
Things were not much better at The Warehouse, which reported a first-half loss of $23.7m.
Chief executive Nick Grayston said the group expects tough retail market conditions to continue.
“We believe the macro-economic climate will remain difficult, and it is challenging to predict how cautious consumer spending will impact sales across all our brands,” says Grayston.
“Our second half is now under way, and we’ve seen much tougher trade in February with sales decline in the low teens.
“In March we’ve seen some improvement, with our sales decline returning to be more in line with the level of decline experienced in our first half.”
GDP data for the December quarter, which showed a 0.1 per cent decline, confirmed what many had thought - the economy went into recession over the second half of last year.
Then came the latest statement from the Federal Reserve, which indicated it still expects to cut interest rates by three-quarters of a percentage point this year.
For the time being, though, the Fed kept its Fed funds rate at 5.25 per cent to 5.5 per cent - a 23-year high.
All these factors will no doubt be of interest to the Reserve Bank, whose last set of forecasts have the official cash rate remaining at 5.5 per cent throughout this year and well into 2025.
Craigs Investment Partners investment director Mark Lister said latest news from the retail sector highlighted how tough conditions are in terms of spending and consumer sentiment.
“Our Reserve Bank should review all of that stuff and ask themselves whether they need to wait until next year before the next cut,” Lister said.
Contrary to the Reserve Bank’s forecasts, market expectations are for a cut towards the end of this year.
“I’m thinking it is the second half of this year, for sure,” Lister said.
On that score, the bad news may have a silver lining for the market.
“The market is definitely thinking August for an OCR cut – which would be good for the sharemarket and good for borrowers.
“But you have to view it against the backdrop of sluggish economic activity.”
“The typical company in New Zealand is your defensive utility, infrastructure or real estate trust, so for them there is more good than bad [from rate cuts].
“If, within the next six months, we have cuts in the OCR, that is going to shift a lot of people’s attention back to assets that generate strong cashflow and income, like the sharemarket.”
OCR cuts will make term deposits look a little less attractive, relative to stocks.
“We don’t want to see the economy struggle, but if it leads to a reprieve on the interest rate front, then it could give the economy a boost and give the sharemarket the shot in the arm,” he said.
The local market has struggled to perform over the last three years, while others have shone.
The NZX 50 index has lost 13 per cent from its peak of 13,558 set in January 2021, while US, Japanese, European and Australian sharemarkets have broken through record highs.
However, even at these lower levels, the 12-month forward weighted price earnings ratio for the New Zealand market is currently 22.0 times, or 21 per cent, above the long-run average.
Lister said with many New Zealand stocks now trading at lower levels, there was potential for corporate activity.
But so far, talk of potential takeover activity has been just that.
Last month, mānuka honey exporter Comvita said a “credible offshore party” had approached the company with a “highly conditional” unsolicited, indicative, non-binding proposal to acquire all of its shares. The indicated offer price represents a significant premium to the current share price, Comvita said.
In December, Rakon said it had also received an unsolicited, non-binding, indicative proposal for the acquisition of all of the shares in the company.
Despite its grisly result, shares in Warehouse Group rallied.
In its analysis, Jarden said the company was moving on from its loss-making businesses.
Following the decision to sell Torpedo7 in February, The Warehouse also indicated its intention to “sell or close” TheMarket.com by the end of the financial year.
“This is likely to cause a positive change in investor sentiment and we hope signals a more disciplined approach to capital by the company, with greater focus on its core brands,” Jarden said.
“This is also a positive for near-term earnings, with the company removing two large earnings drags from the business.”
Over the past five years, the two divisions combined have contributed an operating loss of $134m, or 39 cents per share.
“Whilst the balance sheet has also been reset lower with net debt of $19m, we do not expect Warehouse Group to deploy capital outside its core brands in the near term,” Jarden said.
The NZX has released its notice of meeting for the annual meeting on April 18.
The notice included a resolution to increase the director fee pool by 38 per cent, partly on the advice of a consultant report from PwC - a proposal that raised eyebrows given the poor performance of the NZX’s share price, which is currently around $1 – a level last seen about six years ago, Craigs Investment Partners noted.
Craigs cited some choice quotes from the “Sage of Omaha” and Berkshire Hathaway founder, Warren Buffett, and his long-time partner, the late Charlie Munger, on the subject of hiring consultants to opine on appropriate director and executive compensation and selection:
“I would rather throw a viper down my shirtfront than hire a compensation consultant.”
“I’ve never seen a compensation consultant suggest fees should be lower.”
“Charlie and I believe our four criteria are essential if directors are to do their job – which, by law, is to faithfully represent owners. Yet these criteria are usually ignored.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.