Best & Less warns of worsening retail conditions amid profit downgrade

The takeover target is the latest in a long line of retailers including Domino’s Pizza and Baby Bunting to warn of worsening trading conditions amid consumers slash spending.

Best & Less has slashed its profit forecasts and warned of worsening trading conditions.

Best & Less, the general merchandise store currently the subject of a $237m takeover bid from billionaire entrepreneur Brett Blundy, is the latest retailer to reveal woeful treading conditions for the retail sector with sales worsening since May.

Its sales have slumped more than 13 per cent, with Best & Less warning on Tuesday that it now expects its half-year profit to collapse by as much as two thirds as heavy promotional and discounting activity in the general merchandise sector ramps up the competitive heat and robs it of profit margins.

Best & Less is the latest discretionary retailer to warn of deteriorating conditions in the sector and issue a savage profit warning, with companies such as Treasury Wine Estates, Baby Bunting, Domino’s Pizza, Michael Hill, Maggie Beer Holdings and dusk warning of a sales slump and profit crunch as consumers rein in their spending.

Last week, The Australian revealed that upmarket department store David Jones was suffering sales retreats of as much as 30 per cent at some of its stores in the face of collapsing consumer confidence and spending.

Best & Less said since the company’s most recent trading update on May 17 trading conditions had continued to soften, with sales and foot traffic lagging the prior year. For the five trading weeks from May 15 to June 18, total sales were down 11.7 per cent, or $9m, below the prior corresponding period and like for like sales were down 13.2 per cent below the same time last year.

Through the 24 trading weeks in the second half, like for like sales were down 4.5 per cent below the previous corresponding period.

It blamed the sales dive on a ramp up of promotions and discounting by others to clear unwanted seasonal stock.

“In-season promotional and discount activity to clear winter stock has been accelerated, and yearly inventory is also being reduced to align Best & Less’s inventory position with current demand and maintain inventory quality.

“This activity has negatively impacted gross margin in the fourth quarter, which is expected to continue into the first quarter of 2024 as the winter season is closed out. Further expense management initiatives have been implemented to right size Best & Less’s cost base for the conditions, however the full benefit of these actions and lower product and shipping costs will not be seen until the first half of 2024.”

Best & Less said for the second half it now expects to deliver total revenue of between $310m and $315m and pro forma net profit after tax of between $3.6m and $4.2m, which excludes a potential after tax impairment charge on right of use assets for its store leases of between $1.5m and $3m. These potential impairments are driven by the expected downturn in future cashflows expected due to the deteriorating trading conditions within the retail sector.

This is a savage cut to profit expectations and compares to the company’s previous guidance for pro forma profit after tax of between $10m and $12m.

Best & Less said Ray Itaoui, who joined it as executive chair on June 5 and has assumed the responsibilities of chief executive for an interim period. Since joining the company, Mr Itaoui has rapidly implemented a range of actions to position Best & Less for more challenging trading conditions, the retailer said.

In May, Mr Blundy and Mr Itaoui launched a $1.89-per-share takeover bid for the retailer. As at June 20 the bidders have 67.86 per cent of the company.