Harvey Norman boss Gerry Harvey has said that it is inevitable that interest rates will have to rise this year. The comments come as the USA consumer electronics market witnesses a massive downturn in profits and sales.
The Reserve Bank’s recent decision to leave interest rates unchanged yesterday has given a reprieve to retailers in Australia, who can look forward in the short term to continued strength in consumer spending.
However CE trends in the USA where major chains like Circuit City are reporting losses and other chains like Best Buys closing stores may be a worry for Australia with some analysts claiming that the same will happen in Australia as retailers continue to erode margin from products.
The central bank recently left the official cash rate at 6.25 per cent, despite the release of figures earlier in the week showing annual growth in retail trade running at 7 per cent. But according to the Australian newspaper Legg Mason analyst Tony Pearce said a rate hike in coming months was now more likely, and retailers vulnerable to a downturn in discretionary spending such as David Jones, Harvey Norman and Myer would soon be brought back to earth.
“There are no impediments to retail spending at the moment – employment remains very strong and petrol prices have gone up but aren’t out of control,” he said. “If you visit those stores, people are queued up to buy stuff at the weekends. There’s no sign of any slowdown, but a rate hike will be a bit of a wake-up call, which will be healthy in the long run.”
But Gerry Harvey, executive chairman of Harvey Norman, said he didn’t expect a rate hike to dampen consumer demand.
“I think spending will remain strong even if rates do rise but I don’t think the RBA has any choice – they have to raise rates in the future, in my opinion,” he said.
“At the moment our sales are so strong I’m amazed … they’re stronger now than when interest rates were at 4.25 per cent. Even if it goes up to 7.25 per cent, sales might be okay.”
Wesfarmers chief executive Richard Goyder said he was happy with the RBA’s decision.
“I am pleased about that from Wesfarmers’ point of view but I am also pleased about it from an economic point of view because I think it is right,” he said.
“We have had very strong growth over a lot of years in Australia and keeping that balance between inflation and growth is important.”
Commonwealth Bank chief economist Michael Blythe said a rate hike was possible in May, if first-quarter consumer price figures released later this month were on the high side.
“A renewed down trend in the unemployment rate and a lift in credit growth would be the signals for an imminent rate move,” he said.
In the USA Circuit City Stores posted net losses for its 2007 fourth quarter, blaming the shortfall on falling flat-panel TV prices and poor PC sales.
For the fourth quarter, ended Feb. 28, the retail chain posted a net loss of $12.2 million on sales of $3.9 billion, and $11.8 million on annual sales of $12.4 billion. Net sales did increase for both periods, growing 1.2 percent for the quarter and 7.9 percent for the year. These figures are down considerably from last year when Circuit recorded a fourth-quarter net profit of $141.4 million along with a net profit of $139.7 million profit for the year.
For the quarter, comp-stores sales fell 0.5 percent, but were up for the year by 5.8 percent.
Compounding the product pricing issues, Circuit’s net earnings were hurt by payments related to store closings and other reorganization-related charges. In a post 2007 fiscal move, Circuit City reported another major shake-up last month.
“Fourth-quarter sales growth was somewhat less than we expected. During the quarter, flat-panel television average selling prices were well below the prior year, and our PC hardware business experienced volatility around the Microsoft Windows Vista operating system transition,” he said. “PC hardware posted strong sales growth in both December and February, but January sales were impacted as we kept PC inventories lean in advance of the transition.”
Circuit said its video category generated low-single-digit comp-store decreases for the quarter, with overall sales for the year being described as flat compared with 2006. This situation was created by double-digit declines in projection and CRT TV sales, which offset a similar increase in the flat-panel category.
Other areas experiencing declines were digital imaging, camcorders, DVD hardware, desktop PCs, satellite radio and home audio.
Helping the chain’s balance sheet were sales increases in notebook computer, portable audio, navigation and video game products. The company expects these categories to continue to grow this year.