Morningstar publishes a number of special reports that provide in-depth analysis of individual securities, sectors and asset classes. Johannes Faul has recently published a report on Australian Department stores.

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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 Amazon 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 (ASX: WES)-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.

 

Johannes Faul is a Morningstar senior equity analyst. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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