Wow. Revenues of Listed Retail Firms Validate Slowdown of Consumer Spending GDP in 1H!

Consumerism is a function of monetary inflation because easy money policies create the illusion of wealth and thus lead individuals to consume more than they would otherwise. Because consumption increases, the capital stock will decline and society will ultimately be poorer than it would have been—Louis Rouanet

Wow. Revenues of Listed Retail Firms Validate Slowdown of Consumer Spending GDP in 1H!

Last week, I mentioned that from the GDP’s standpoint, consumer spending has remarkably wilted in the 1H.

I noted of three things. One, the drop in real GDP from 7.5% to 5.9% or a 21.33% contraction was substantial. It was a thud, a dynamic that should not be ignored or dismissed. Two, the consumer spending (HFCE) has fallen to 2014-2015 levels. Three, the long term share of consumer spending to GDP has been corroding. [See 2Q and 1H GDP: What Happened to the Domestic Consumers? Government Spending and GDP Deflator Saves the Day! August 20, 2017]

As one of the biggest absorber of resources and credit, a consumer slowdown would impact significantly the real economy and the country’s credit conditions.

What’s truly incredible has been that revenues of listed retail firms have resonated with consumer woes reflected on the GDP!

 

Let me just say first that the decline in consumer spending has coincided with the rollover of M3.

Because debt monetization spurred price hikes in the real economy, this must have prompted the BSP to go slow on their policy of inflationary finance. Such has caused a deceleration in the circulation of money (M3) growth.

Since the transmission of BSP policy comes with a time lag, real economy prices continued to rise. Apparently, CPI above 1.5% in 2Q 2016 turned to be the threshold of pain for consumers. When CPI doubled from then, consumer spending sagged to 2017’s 1Q and 2Q levels. So for the past two years plus, domestic liquidity (M3) which affects real economy prices (CPI) have played vital roles in contributing to the health of consumer spending.

As noted above, what has been awesome about the HFCE has been that it REGISTERED with real economic activities!

So I present below the top line conditions of the major retail outlets which essentially validates the GDP

Nota Bene and caveats:

The following profiles have been intended to show the relevance of GDP’s HFCE to the retail industry.

Comparing real HFCE as against nominal revenues won’t exactly be apples to apples. But the idea here is again to show the correlation or the link between GDP and retail performance. Yes, micro equals macro.

Ayala Corporation has not been included in the list because it has no segregated classification of retail sales

Philippine Seven

Despite a surge in new stores (19.94%), Philippine Seven Corporation [PSE:SEVN] or owners of the 7-11 franchise saw their total revenues tumble sharply from 34.17% in the 1H of 2016 to 11.38%. That’s a stunning 67% crash! (left window)

System-wide sales growth, which includes franchised stores, also fumbled to 16.9% in 2017 from 27.2% in 2016. Though SEVN mentions system wide sales in its discussion, it only publishes only its internally generated revenues

To apply sales per store, SEVN posted a considerable -7.14% decline in 2017 compared to +8.34 in 2016. This represents a substantial deterioration in SEVN’s store efficiency.

And because of its fiery pace of expansion, rent rose by 22.6% which put pressure on its operating costs. And because of insufficient resources to finance its expansions, the company operates with “a negative working capital position, which is manifested by a current ratio of 0.80:1 from 0.83:1 at the end of 2016” it expanded total debt (long term+ current + bank loans) by 42.28%. The surge in debt increased financing costs, “Interest incurred to service debt increased by 46.5 percent to P27.6 million”

SEVN’s gross margin was at 25.47% while operating margin was at 3.62%.

Confronted by an increasingly fragile top line, SEVN’s race to build capacity appears to be a toxic model. 7-11 of Indonesia which closed this year was virtually plagued by the same business paradigm

Metro Retail Sales Group

Despite the 6% capacity addition, Metro Retail Stores Group [PSE: MRSGI] saw its 1H sales growth rate slashed to 3.32% in 2017 from 8.82% in 2016. That would signify a 62.4% crash in growth rates!

According to the company’s report, “Same store sales growth was 1.0% in 2017 as compared to 5.0% in 2016.” Wow. Newly added capacity was mainly responsible for the bulk of the top line sales performance.

Since MRSGI’s sales effectively reflect on the BSP’s CPI rate, the company’s real growth would actually be ZERO!

The company declared that cost of sales rose by only 1.65%. Hence, the slim difference in growth rates in favor of the top line essentially provided them the big 53% jump in profits.

Amazing.

MRSGI’s total sales per store dipped -2.74% in 2017 compared to -.06% in 2016. What dichotomy: inefficient stores can actually deliver big profits!

MRGSI’s gross margin was at 21.28% while operating margin was at 3.4%.

And because MRGSI was able to raise about Php 4 billion from its IPO in 2015, it used the proceeds to finance most of its operation and expansions.

The company’s cash has been reduced to Php 1.2 billion from Php 3.3 billion at the close of 2016. It would seem that the company would be tapping the credit markets soon.

 

Puregold

The PSEi 30’s only retail, the supermarket chain and warehouse shopping, Puregold [PSE’s PGOLD] likewise posted a sharp drop in the net sales growth rate.

2017’s net sales clocked in at only 10.8% compared to 18.35%. That would account for a 41% plunge in growth rates! (left)

Though the company reported that growth contributions came from same store sales and from “new organic stores”, I haven’t seen the data on the existing and additional number of stores for the period.

What’s striking has been that net sales (same store sales) have been cleaved by 43% to 4% in 2017 from 7% in 2016 (right window).

At the same time, net ticket or the average spending per buyer was also down to 2.8% in 2017 from 2016. Apparently,PGOLD’s consumers shifted to S&R which saw a big jump in net sales (10.2%) and in net ticket (+6.4%). Although the substantial gains from S&R’s sales have hardly been sufficient to cover the gap in PGOLD’s performance.

PGOLD’s gross margin was at 16.61% while operating margin at 6.3%.

 

Robinsons Retail

With the exception of the DIY, the growth rates of same store sales for the entire spectrum of Robinsons Retail (RRHI) virtually plummeted. (left window)

Department store sales, the second largest segment in the firms sales, even turned negative (-1.4% 1H, -2.6% 2Q)! Supermarket, which accounted for the largest share in the firm’s sales, cratered to 2.0% in 1H 2017 from 8.8% in 1H 2016 (1.2% 2Q).  Specialty stores, the segment with the highest growth rate, halved (7% 1H 2017 from 15.1% 2016)!

Overall the firm’s same stores sales growth rate plunged 2.7% in 1H of 2017 from 8.9% in 2016. (lower right) That would account for a whopping 70% crash in growth rate! 1H 2015’s same store sales had even been higher at 2.9%.

As I noted above, RGDP’s Household consumption growth rates have fallen to 2015 levels. RRHI performance validates this point.

Growth rate of total revenues was slashed to 10.66% in 1H 2017 from 16.88% in 1H 2016. That’s a huge 37% drop!

Since gross selling area grew by 6.81% basically, RRHI sales growth was driven primarily by new stores mostly from the recent incorporation of The Generics Pharmacy ‘TGP’ acquired in 2016.

The inclusion of TGP’s figures basically concealed the weakness in the organic sales numbers of the company.

Nevertheless, sales per gfa was registered at 3.6% compared to 5.52% over the same period. So it sold less per sqm. than the previous

RRHI’s gross margin was at 22.3% while operating margin at 6.13%.

 

SSI Group

SSI’s net sales posted a negative 1.91% in the 1H of 2017 compared to 8.53% in 2016. But that has partly been due to a reduction in stores (gross selling space) which was down 6.44% over the same period. The company undertook a store rationalization program to “improve operating efficiencies through the closure of underperforming stores”.

(Ceteris Paribus or given all things constant) Had rationalization been a big factor, there would have been substantial improvements in sales per GSP or sales per store compared to the previous years. But that has hardly been the case. Net sales per GSP recorded lower growth to 4.84% in 1H 2017 from 8.15% last year. Of course, adjustments from the rationalization program would have affected performance too.

Nevertheless from a product segment perspective, SSI sales have been frail across the board. Sales in the smaller segment casual and footwear reported huge deficits -21% and -6.4%, respectively, while improvements on bigger item issues such as fast fashion (+3.94%) and luxury & bridge (+2.94%) has hardly been significant.

These demonstrate that the slower sales per gsp most likely have been affected by a weaker consumer spending more than other factors.

SSI’s gross margin was at 48.8% in 1H 2017 down from 50.12 in 2016, while net income margin was at 3.3% and 2.8%.

So far, the huge margins have signified as the company’s saving grace. However, margins alone would be vulnerable to a fragile headline.

SM Investments

 

SM Retail’s incorporation into SM Investments has skewed the comparative numbers in the latter’s latest 17-Q

One thing sticks though. 1H 2017 merchandise sales grew by only a shocking 5.86%! Yes, that would be a tad bit above CPI and the General Retail Price Index! In real terms, there was very little growth!

To reckon based on the SM’s “raw” numbers merchandise sales rocketed 28.56% in 2016. That would be a huge difference from 2017

Also, 2017’s sales growth would be lower than 2015’s 6.07%. Hence, the LOWEST 1H sales performance in the past 5 years would be this 2017!

If “raw” numbers would be adjusted to include 2016’s retail (specialty) sales, 2017’s 5.86% merchandise sales growth would still be lower than 2016’s 7.2%

However, 5.86% would be higher than 2015’s 5.01%. Still, 2017’s merchandise sales accounted for the second LOWEST sales after 2015 in 5 years! In short, sales of 1H 2015 and 2017 basically share the same top line story!

The company does not say what the status of same store sales.

Nevertheless, sales figures are backed by inventory and capacity. Here we deal with capacity.

2017 sales growth came in the backdrop of a 10% growth in core business capacity (SM Stores, SM Supermarkets, Savemore, Hypermarkets, Walmart) AND the recent inclusion of 1,709 specialty stores!

This implies of a staggering increase in SM retail’s supply. Yet the firm registered a measly 5.86% output!

This would most likely represent a big time replica of Robinsons Retail!

Given the lack of data, the published numbers indicate of very low sales per store or sales per selling space!

SM’s aggressive expansion has only produced increasing inefficiency!

Conclusion

The huge expansion in systemic credit (as of June: production bank loans +17.88%, 22.54% consumer loans),

In the milieu of a huge expansion in systemic credit (as of June: production bank loans +17.88%, 22.54% consumer loans) it has been really remarkable to see retail outlets suffering from increasingly fragile top line growth

Said differently, present developments reveal of the irony of enormous leveraging barely driving vital increases in the headline numbers.

This only shows that improvements in financial statements of these companies have mostly come from the either the cost side or from debt financed expansion.

And yet, one would doubt how accurate those cost numbers have been.

Even more, sales growth of 2017 has dropped to 2015 levels even as the supply of 2017 has vastly been more than 2015.

And come to think of it, with the exception of SSI, these companies have been imbued with the idea that Filipino consumers have unlimited pockets for them to pursue the paradigm of the race to build supply as primary drivers of growth!

Such aggressiveness implies of complacency.

Yet, risks abound.  Signs of increasingly strained consumers have resurfaced. With the prospects of oversupply, such lethal combination will surely have an impact on their financials and to the real economy in the near future.

This is not about biases but about economics.

Also, GDP numbers may not even be accurate. Given the huge drop in headline sales (same store PLUS expansion) of the above firms, the Household Final Consumer Expenditure (HFCE) GDP numbers may even be inflated.

Finally, if organic revenues don’t meaningfully recover soon, then expect to see the waves of retail vacancies re-emerge.