Brief Thematic: Japan Department Store Apparel Sales Down 35% in a Decade and more

In this briefing:

1. Japan Department Store Apparel Sales Down 35% in a Decade
2. Japanese Supermarket Consolidation Likely and Soon
3. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling
4. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten
5. Aussie Reporting Season Update: February 2019

1. Japan Department Store Apparel Sales Down 35% in a Decade

Last month, the Japan Department Store Association (JDSA) announced a 1.1% drop in sales at department stores for calendar year 2018, with sales also down 0.8% on a same-store basis.

This was a reasonable result in a year when there were many store closures, both permanent and temporary, and slow traffic due to extreme weather events, and of course the background trend of an ageing consumer base.

However, the underlying trend remains clear: apparel sales continue to fall, down more than a third in a decade. Meanwhile, cosmetics has seen its share of sales double.

Since apparel accounts for 30% of department store sales on average and as much as 50% for regional stores, this is a serious weakness. With competition from speciality chains and online intensifying yet further and department stores themselves cutting space for apparel, there is unlikely to be any respite.

For this reason, and with further store closures planned in the next few years, the department store sector will continue to contract.

2. Japanese Supermarket Consolidation Likely and Soon

Signs of consolidation in the supermarket sector have come and gone over the past decade, but recent events suggest there will now be a sustained increase.

Traditionalists, and the wholesalers, who control the sector, point to the positives of greater variety and local food differentiation; yet these are what have kept the sector so fragmented and inefficient.

However, with falling populations and a shift to online buying gradually gaining momentum, as well as encroachment from other sectors such as drugstores, the time is ripe for bigger fish to start eating up the many, many tiddlers. 

3. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling

CHILLING – A winter chill has descended over the Japanese equity market. As we covered in our Insight on market aggregate earnings Japan: Winter Results & Revisions Flash the net income of corporate Japan peaked on 26th December, However, reported earnings are a lagging indicator, and in this instance, the ‘lag’ was almost one year, with the Total Market Capitalisation (excluding REITs) peaking on 23rd January 2018. Our preferred, and often leading, indicators are the All-Market Composite Results Score – a measure of the trend and momentum in quarterly corporate earnings the All-Market Composite Forecast/Revision Score – which measures the trend and rate of change in company initial forecasts and revisions. The Results Score peaked on 1st February 2018, seven trading days after the market peak and is now one year into an extended period of decline. The Forecast/Revision Score is slowing peaked out on 27th October 2017, three months ahead of the market and the Results Score – demonstrating the reliability of company forecasts, as opposed to ‘consensus’, as a leading indicator of future earnings. Revisions have continued to ‘lead’ on the way down and 0.55 points ‘ahead’.   

TURNING NEGATIVE? – Subtracting the Forecast/Revision Score from the Results Score shows the extent of the lag in the latter. The relationship has been relatively stable of over one year; however, as we ‘roll’ into the next fiscal year’s forecasts in May, we can expect the difference to move closer to zero as both scores turn negative. As the cycle bottoms out, the revisions will recover ahead of results, and the difference will also become negative, setting the stage for the next upswing in later 2019 or early 2020.  

On each of the three occasions since 2006 when the Results Score has fallen below ‘4’, it has subsequently fallen below zero. In 2012, the decline was muted by the advent of the Bank of Japan (BOJ)’s policy of weakening the currency. The current score of 2.14 suggests we are continuing on a path to zero and below.  Failing a currency move through ¥115 (see below), the Results Score should turn negative by the time the full-year results are announced next May. We also expect a high degree of caution in forecasting, especially on the Auto sector which is overshadowed by the prospect of US tariffs. The announcement of the closer of Honda Motor (7267 JP)‘s car plant in Swindon in the UK is not a good portent.  

BEAR MARKET RALLY & THE YEN – Total Market Value has recovered by 13.8% since Christmas Day and is currently at the same level as when we published our Autumn review – SloMo Slowdown. With earnings and revisions heading lower, the implied expectation is for some or all of – a further central bank easing, a resolution of current trade tensions, and a weakening of the Yen. The last has been the ‘get-out-of-jail’ card for Japanese equities. Our chart compares the year-on-year percentage change in the US$/¥ exchange rate with a lag of six months to the Combined Results and Revision Score (with each sore being equally-weighted). The last eight turning points for the rate of change of the cross rate, have coincided with directional changes in earnings and revisions momentum. The recent weakness in the currency suggests a more stable market – at least until the late spring. 

4. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) will allocate 2.2 GHz of new spectrum bandwidth by the end of March equal to 2.8x the existing spectrum base. This is not unexpected but we think this is a good opportunity to re-iterate some of the positive points on 5G spectrum as operators make their final applications this month and we wait for a final decision in six weeks. Importantly, with ten spectrum channels, not everyone will be treated equally although all should benefit. We expect Rakuten Inc (4755 JP)  to pick up one-two bands whilst KDDI Corp (9433 JP) , NTT Docomo Inc (9437 JP) and Softbank Corp (9434 JP)  should all receive at least two.

5. Aussie Reporting Season Update: February 2019

• The Banks remain under earnings pressure from several fronts, with weak credit growth, falling net interest margins and rising compliance costs following the Banking Royal Commission. The CBA and BEN results highlighted these headwinds and how borrowers are migrating from high margin interest-only loans to lower margin principal and interest loans.  Away from Banks, the insurance sector has navigated its way through several weather events relatively successfully, with IAG and SUN delivering in this space. 
• Fears that declining house prices would rattle the consumer have generally been misplaced, at least thus far. The JBH and SUL results showed how well-managed businesses have been able to shift the product mix to maintain margins.  Similarly, the DHG result showed that even with declining listings it’s possible to lift earnings in the face of these headwinds.  However, the BAP result was clearly impacted by the weak consumer. 
• In the infrastructure capex space, CIM produced a solid result, but DOW failed to meet analysts’ expectations even if the work pipeline is still growing. Higher integration and stamp duty costs took the gloss off the TCL result even though the longer-term growth opportunities look solid.
• Growth stocks trading on high PE multiples such as CSL and TWE delivered strong earnings growth, but this wasn’t enough to satisfy investors. These stocks sold- off after delivering solid half-year results.  RMD was a clear miss on revenue, with the market questioning management’s decision to investment away from its core business. 
• Cost pressures felt in the US operations of AMC and BXB appear to be easing. BXB is investing to defend earnings, while AMC is seeing new opportunities in its Bemis acquisition and coffee pod manufacturing.  TLS continues to face pressure from the NBN and competition in mobile.  The new 5G network is expected to deliver some relief on margins.