Glimmer of hope for Australian Christmas sales

MELBOURNE (Reuters) - Lower mortgage payments, cheaper petrol and big discounts offer some hope of a Christmas shopping boost for Australia's retailers even as the grip of recession means it will be a tough festive season globally.

But, while supermarket chain operators Wesfarmers Ltd (WES.AX) and Woolworths Ltd (WOW.AX) should fare better than European retailers such as Marks & Spencer Group Plc (MKS.L), heavy discounting will eat into profits in the new year.

As the global economy shrinks, retailers from Europe to the United States have slashed prices to get customers to part with their cash. Marks & Spencer has held two special cut-price pre-Christmas sales, consultant Bain & Co has warned U.S. holiday season sales may fall for the first time in decades.

In contrast, Woolworths has said it expects Christmas trading to be underpinned by government stimulus, interest rate cuts and cash bonuses, while up-market department store retailer David Jones Ltd (DJS.AX) is confident people will keep shopping this month despite the tough conditions.

"It may not have happened yet, but when it comes into December people are still going to spend on their families," David Jones CEO Mark McInnes said last month.

There are reasons for his optimism:

Australia's economy is clinging to growth, while others are in recession; A$8 billion ($5 billion) worth of government handouts will this month land in the wallets of pensioners and low- to middle-income families; and, according to broker CommSec, the average household's fuel bill is A$70 a month lower than six months ago while big interest rate cuts have lopped almost A$600 off the monthly payment of an average A$300,000 mortgage.

Consumer spending accounts for 60 percent of economic output.

"Mortgage payments have dropped and petrol prices have dropped, so we have more to spend," said Charlotte Robinson, a working mum with teenage children.

"The sales are a bonus," she added, while waiting to see a Christmas display in the windows of a Myer department store in Melbourne.

CommSec Equities Economist Savanth Sebastian says anecdotal evidence suggests consumers are not finding it quite as tough as had been made out, noting a surprise 0.7 percent rise in October retail sales versus the previous month.

"Although Christmas gains won't be as big as last year, we are expecting 2.5 to 3 percent growth," said Richard Evans, executive director of the Australian Retailers Association.

The association said 2007 Christmas spending gains were more than 7 percent.

Wesfarmers and Woolworths both pushed up profits in 2007/08 and have said July-October sales were strong.

DELAYING THE PAIN?

While Christmas sales are traditionally higher than in other months, analysts and industry representatives said the key was that Christmas margins were usually high enough to cover costs for the rest of the year.

This year, however, the full-page newspaper ads highlighting discounts at Myer and David Jones have begun early, and Wesfarmers' Target clothing and homewares stores is already sending out discount catalogues.

Furniture and electrical goods retailer Harvey Norman Holdings Ltd (HVN.AX) is finding the going tough. Its sales have dropped and it warned last week that its first-quarter pretax profit was likely to fall by nearly a third.

Harvey Norman shares have dropped 64 percent this year, while Wesfarmers is down 52 percent and Woolworths 26 percent. Over the same period, the broader share market .AXJO is off 44 percent.

The aggressive pursuit of sales before the traditional post-Christmas period will come with a profit cost further down the line, analysts say.

"Retailers will discount to clear so their sales numbers may look okay, but the margin implications of the Christmas period aren't going to be good," said Sondal Bensan, investment analyst at BT Investment Management.

There is also concern that consumer spending could dry up if global financial markets don't pick up once Christmas and the sales are passed.

CommSec's Sebastian said the 2009 first quarter was a potential turning point.

"We're really just buying time for the Australian economy at the moment and we need to just buy time until the global economy hits a trough and starts to turn around," he said.

(Editing by Dhara Ranasinghe & Ian Geoghegan)