Retail shares plummet after David Jones delivers shock profit warning

The retail industry was hit hard this morning, with shares in major companies including Myer, JB Hi-Fi and Harvey Norman falling after a profit expectation downgrade from David Jones triggered a massive sell-off.

Shares in David Jones dropped by 14.5% after it said half-year profit could drop by 12% while Harvey Norman and JB Hi-Fi shares dropped by 3.48% and 4.53% respectively.

Shares in Myer fell 4.5% even though it confirmed its guidance overnight.

The David Jones announcement and subsequent share price falls highlight how much pressure the retail industry continues to suffer, pessimistic expectations for this year’s reporting season and how vulnerable the economy remains to another interest rate rise.

The David Jones announcement comes days after fashion retailer Noni B made a similar announcement, with new surveys from Westpac and credit ratings agency Dun & Bradstreet showing continued lack of confidence among consumers.

David Jones said yesterday that it expects total sales for the fourth quarter to be down 11% with profit after tax for the second half down between 9-12% from the second half of 2010 – resulting in a full year profit decline between 0.5-2%.

“The dramatic and rapid deterioration in trading conditions in 4Q11 has been unprecedented,” said chief executive Paul Zahra in unusually strong words.

“As a result we are taking a cautious approach to 1H12 and have planned and forecast trading conditions to continue to be challenging.

“By resetting our sales budgets we will be better able to manage our inventory and variable costs.”

The share sell-off comes despite Myer saying this morning it would confirm its guidance, although that means profit will be down 5% from last year.

It also said it anticipates “trading conditions would remain challenging for the remainder of FY2011”.

Despite share prices falling JB Hi-Fi and Harvey Norman have not made announcements on profit expectations.

Investors are concerned that weak conditions will hammer both companies, especially JB Hi-Fi which until late last year managed to record better results than most other retailers.

D&B’s Credit Expectations Survey found nearly 33% of Australians will struggle to meet credit commitments and suggests that businesses should be targeting younger consumers who have more disposable income, also confirming that fewer Australians are applying for new credit products.

The survey shows that 37% of respondents expect to use a credit card to purchase something they couldn’t otherwise afford while 21% say household debt will increase in the next three months. Nearly 50% say another interest rate rise would negatively affect household finances.

Nineteen per cent of Australians will apply for a new credit product according to the survey, down 14 points from June 2009. Of those only 8% with a credit card intend applying for a credit limit increase.

D&B chief executive Christine Christian says the data shows consumers are still relying on credit.

“Consumer concern about the effects of a rate rise on household finances does not seem to be deterring Australians from utilising credit,” she says.

“We have seen credit use remain consistent throughout the recession and beyond.”

The survey shows that younger shoppers are more willing to spend and that 46% of those between 18-34 years old are more likely to use a credit card to buy something they can’t afford compared to 38% aged 35-49 and 29% aged 50-64.

Christians says that may be a problem.

“In particular we are seeing the most likely demographics to use credit, particularly as a last resort, are also the least able to manage that debt,” she says.