Retail Sector
Reporting Season Lesson - Stick with the Momentum
Australia
Consumer Group
Shaun CousinsAC
(61-2) 9220-1524
shaun.r.cousins@jpmorgan.com
Stuart Jackson, CFA
(61-2) 9220-1601
stuart.a.jackson@jpmorgan.com
Samantha Carleton
(61-2) 9220-1692
samantha.e.carleton@jpmorgan.com
Richard Szabo
(61-2) 9220-1408
richard.x.szabo@jpmorgan.com
J.P. Morgan Securities Australia Limited
See page 102 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Table 1: Retail Normalised EPS
Revisions
NEPS FY10 NEPS FY10
Company Revision Growth Rate
BBG 0.4% 4.6%
CPR -87.9% -98.2%
FAN -1.2% -0.6%
GLB -6.1% -112.7%
HVN 6.9% 4.5%
JBH 6.6% 20.9%
PBG -0.4% -17.0%
WES 2.8% -28.7%
WOW 0.0% 14.4%
Source: J.P. Morgan estimates.
Figure 1: Share Price Performance
Since 1 January 2009
70
75
80
85
90
95
100
105
110
115
01-Jan-
09
21-Jan-
09
10-Feb-
09
02-
Mar-09
WOW WES
BBG HVN
JBH
Source: IRESS
• The reporting season for the retail companies is largely over, with only the
July year-end companies (e.g. WHS, PMV, DJS and ORL) yet to report. In
this report we detail the key outcomes and themes from reporting season
while reiterating the key issues we see for the larger companies and our
preferences across the sector.
• Following the reporting season, we have reduced normalised EPS for FY09E,
FY10E and FY11E by -3.6%, 1.2% and 2.4%, respectively. Our normalised
EPS growth rate for FY09E, FY10E and FY11E has been reduced to -1.8%
(0.4% previously), -1.0% (-4.5% previously) and 15.7%, (16.5% previously).
• There were several themes of interest: 1) EBIT fell for most companies,
with those suffering from slowing sales momentum struggling, such as
HVN and BBG, while those with strong sales momentum, such as WOW
(especially in Australian Food & Liquor) and JBH, grew EBIT margins
significantly. 2) Cash flow performance was mixed, with JBH, HVN,
WOW and WES doing well, but BBG and PBG very weak, with working
capital management the key enabler of a strong cash flow performance. 3)
Dividends increased for the better performing retailers, but were cut to
zero at PBG and reduced at HVN and WES. 4) Cost saving plans were
announced by several companies, including PBG and BBG, capex plans
were shelved at WOW and HVN, and WOW and WES both noted
preparations were made for a further, and sustained, deterioration in the
trading environment. 5) Current trading commentary was generally that
the path of 1H09 had continued into the first 7 weeks of 2H09, although we
note no companies were suggesting that trading had improved dramatically.
• Following this reporting season, we retain our preference for staples over
discretionary companies. Our concerns about the slowing consumer are
delayed somewhat, with the likelihood that fiscal stimulus in 2009 will
provide a temporary fillip for consumption, as occurred in late 2008. Our
key stock picks in large caps remain WOW in staples, JBH in
discretionary with HVN also Overweight on valuation grounds, although
the outlook for big ticket retailing (and Ireland) remains challenging.
Our next preferred would be WES and BBG, with MTS least preferred.
• Overall, we would be advocating investors stick with the companies that
have performed strongly in 1H09, namely WOW and JBH, as these
retailers have significant momentum which remains very attractive in this
environment.
• Within this report, we have detailed the key issues from the reporting season
for each of the larger companies that reported, namely WOW, WES, HVN,
BBG and JBH, with PBG also profiled with the outlook for that company
largely binary.

Table of Contents
Overview of the 1H09 Reporting Season................................3
Changes to EPS Forecasts and growth rates ................................................................3
Key Themes from Reporting Season in the Retail Sector............................................3
Billabong International Ltd (Neutral) ......................................7
Issue 1 – Underlying EPS Growth Downgraded Yet Again ........................................8
Issue 2 – Americas EBITDA Margins Under Pressure..............................................10
Issue 3 - Outlook for the US Remains Challenged ....................................................13
Issue 4 – While Performing Strongly Now, the Outlook for Europe is Poor .............17
Issue 5 – Retail Underperforming, but an Essential Driver to Medium Term Growth
..................................................................................................................................19
Issue 6 – Strong Brands and a Strong Growth Profile Remain Compelling ..............21
Harvey Norman Holdings Ltd (Overweight) .........................24
Issue 1 – Margin Compression in Franchising Operations due to the Challenging
Consumer Environment .............................................................................................25
Issue 2 – The Financial Performance of New Zealand has Slowed ...........................30
Issue 3 – Ireland Losses were Significant and are Likely to Continue ......................34
Issue 4 – The Property Portfolio is Conservatively Valued and Reduces Operating
Leverage for HVN .....................................................................................................37
Issue 5 – HVN is Trading at a Significant Discount to its Valuation.........................38
JB Hi-Fi Ltd (Overweight) ......................................................41
Issue 1 - Overview of 1H09 Result and Drivers of Medium Term Sales Growth .....42
Issue 2 - The Performance of Clive Anthonys and Hill & Stewart Continue to Raise
Questions About Capital Allocation ..........................................................................47
Pacific Brands Limited (Neutral) ...........................................49
Issue 1 - Cost Savings from “Pacific Brands 2010”...................................................50
Issue 2 – Debt and Cash Flow Position......................................................................57
Wesfarmers Ltd (Neutral).......................................................61
Issue 1 – Free Cash Flow was Strong in 1H09 and the Outlook is Positive for 2H09
..................................................................................................................................62
Issue 2 – Coles Turnaround Remains a Significant Challenge ..................................64
Issue 3 – The Outlook for Non-Food Retail is Poor ..................................................69
Issue 4 –The Outlook for Resources is Challenging..................................................73
Issue 5 – Removal of Debt Refinance Risk Allows Valuation Support to be
Considered .................................................................................................................75
Woolworths Ltd (Overweight) ...............................................77
Issue 1 – The outlook for Australian Food & Liquor remains strong ........................79
Issue 2 – New Zealand Supermarkets Remains a Difficult Turnaround ....................81
Issue 3 – Consumer Electronics Performance Weak with Significant Improvement
Required.....................................................................................................................83
Issue 4 – The Outlook for Big W is Challenging, Although Market Share Gains are
Expected ....................................................................................................................87