Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

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Thematic (Sector/Industry)

<div class="content-highlight"><p>The department store sector faces downsizing amid declining foot traffic and a material uptick in external competition</p></div><hr><p>Times are tough for Australian department stores, and this pressure isn't likely to let up soon. Our cautious stance on the sector hinges on two premises. First, we expect <a href="https://www.smartkarma.com/entities/409" target="_blank" data-smartkarma-citation="entities:409:1">Amazon.com Inc (AMZN US)</a> to prove similarly disruptive to incumbent retailers in Australia as in the U.S., seizing AUD 2.3 billion of annual sales from the sector by fiscal 2027. Second, we forecast a continued decline in the sector's relevance to consumers as they shift their spending to entertainment, leisure, and specialty shops. We forecast these headwinds will reduce the sector's share of the retail market to 4.4% in Australia by fiscal 2027 from 6.0% this year, a magnitude the market is underestimating. We've lowered our sales and EBIT margin estimates for all Australian players to reflect this shrinking market size and intensifying competition. But we expect all department store chains to survive, evolving with the new environment by improving their omnichannel platforms and, for all but <a href="https://www.smartkarma.com/entities/1104" target="_blank" data-smartkarma-citation="entities:1104:1">Wesfarmers Ltd (WES AU)</a>-owned Kmart, gradually reducing their physical store networks. Kmart is in the strongest position to withstand the threats ahead, preserving its store network and protecting its industry-leading margins through its price leadership, as shipping costs act as a deterrent against online pure plays.</p><h2>Key Takeaways</h2><ul><li>We expect the Australian department store sector will prove 30% smaller than our prior estimates, shrinking to AUD 16.7 billion in fiscal 2027 from our prior AUD 24.0 billion estimate and AUD 17.5 billion in fiscal 2017.</li><li>In line with a smaller overall market, we lowered our long-term sales estimates for individual chains by 13%-55%, with Wesfarmers' Target and <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a>'s Big W hit the hardest. More competition translates into greater pricing pressure, and we expect intense competition to endure as Amazon expands. We lowered long-term EBIT margins across the chains by 58-373 basis points.</li><li><a href="https://www.smartkarma.com/entities/577" target="_blank" data-smartkarma-citation="entities:577:1">Myer Holdings Ltd (MYR AU)</a> is the most leveraged to our revised sector outlook, and we cut our fair value estimate by 15% to AUD 0.68, with shares trading at a 13% premium. If Amazon captures just half the sales, and long-term EBIT margins end up 1 percentage point higher than our base case, Myer's fair value estimate climbs 34% to AUD 0.91. Conversely, as department stores represent a relatively small part of Wesfarmers' and Woolworths' portfolios, our changes shave just 5% and 0% off their respective base-case fair value estimates.</li></ul><p><em>Analysts: Johannes Faul, CFA, Angus Hewitt and Bridget Weishaar</em></p>

The department store sector faces downsizing amid declining foot traffic and a material uptick in external competitionTimes are tough for Australian department stores, and this pressure isn't likely to let up soon. Our cautious stance on the sector hinges on two premises. First, we expect Amazon.com Inc (AMZN US) to prove similarly disruptive to incumbent retailers in Australia as in the U.S., seizing AUD 2.3 billion of annual sales from the sector by fiscal 2027. Second, we forecast a continued decline in the sector's relevance to consumers as they shift their spending to entertainment, leisure, and specialty shops. We forecast these headwinds will reduce the sector's share of the retail market to 4.4% in Australia by fiscal 2027 from 6.0% this year, a magnitude the market is underestimating. We've lowered our sales and EBIT margin estimates for all Australian players to reflect this shrinking market size and intensifying competition. But we expect all department store chains to survive, evolving with the new environment by improving their omnichannel platforms and, for all but Wesfarmers Ltd (WES AU)-owned Kmart, gradually reducing their physical store networks. Kmart is in the strongest position to withstand the threats ahead, preserving its store network and protecting its industry-leading margins through its price leadership, as shipping costs act as a deterrent against online pure plays.Key TakeawaysWe expect the Australian department store sector will prove 30% smaller than our prior estimates, shrinking to AUD 16.7 billion in fiscal 2027 from our prior AUD 24.0 billion estimate and AUD 17.5 billion in fiscal 2017.In line with a smaller overall market, we lowered our long-term sales estimates for individual chains by 13%-55%, with Wesfarmers' Target and Woolworths Ltd (WOW AU)'s Big W hit the hardest. More competition translates into greater pricing pressure, and we expect intense competition to endure as Amazon expands. We lowered long-term EBIT margins across the chains by 58-373 basis points.Myer Holdings Ltd (MYR AU) is the most leveraged to our revised sector outlook, and we cut our fair value estimate by 15% to AUD 0.68, with shares trading at a 13% premium. If Amazon captures just half the sales, and long-term EBIT margins end up 1 percentage point higher than our base case, Myer's fair value estimate climbs 34% to AUD 0.91. Conversely, as department stores represent a relatively small part of Wesfarmers' and Woolworths' portfolios, our changes shave just 5% and 0% off their respective base-case fair value estimates.Analysts: Johannes Faul, CFA, Angus Hewitt and Bridget Weishaar

Australian Department Stores Are Going Out of Fashion