Consumer electronics outfit JB Hi-Fi Ltd (ASX: JBH, OTC: JBHIF) presaged a down day for stocks of retailers Down Under on Dec. 16 with its pre-announcement that fiscal 2012 first-half earnings before interest and tax (EBIT) would likely be about 5 percent lower than the AUD127 million posted in 2011.

Comparable sales for the five months to Nov. 30 fell 1.8 percent, while total sales rose 7.8 percent. Gross margin was impacted by 27 basis points in the five-month period compared to a year earlier.

Australian consumers have been cautious about spending for some time, with relatively high interest rates and uncertainly over the global economic backdrop depressing sentiment. Against this backdrop, retailers appear to have been competing to slash prices to entice customers into their stores.

JB Hi-Fi CEO Terry Smart noted said that “sales in the second quarter have improved but unfortunately not enough to counter the impact of the first-quarter decline in sales and margin, driven in large measure by a high level of discounting in the market.”

JB, new this month to Australian Edge How They Rate coverage under Consumer Services, is now one among many in that group to sport an eye-catching yield, in its case 6.1 percent. But that’s after the late-night Thursday (in Chadstone, Victoria, Australia, where JB’s headquartered) forecast shift. And it’s after August’s announcement, along with fiscal 2011 results and management’s initial forecast for 2012, of a 13.8 percent year-over-year reduction in the company’s final dividend.

The stock was hit with a slew of downgrades from investment houses, the last dash in the makings of a double-digit selloff, which is what JB experienced on the Australian Securities Exchange (ASX) Friday, falling 15.3 percent.

The Australian Consumer

The JB story has been writ large in stories questioning whether and how Australia, with its mining boom and relatively low unemployment (5.3 percent versus 7.4 percent in Canada, 8.6 percent in the US) would finally be impacted by Europe’s debt crisis, succumbing at last to externalities and ending its term as the lone developed economy to avoid an official recession in the aftermath of the Great Financial Crisis.

It’s important to note that the pace of sales growth for the company has been on a slowing trend since 2005, when JB moved AUD694 million worth of CDs, DVDs, Blu-Ray discs, video game consoles, video games, flat-screen TVs, cell phones and iPods, up 53.4 percent from fiscal 2004. (JB is the biggest retailer of Apple products in Australia, bigger than Apple stores.) Sales did grow by 8.4 percent to reach nearly AUD3 billion in fiscal 2011, but it’s clear the market believes JB’s best days are in the past. This much might have been deduced from the August final dividend cut. And analysts might also have taken note of the company’s mid-October report that fiscal first-quarter comparable sales were off 3.5 percent.

The double-digit selloff is another really-slow-then-all-at-once crackup in a fear-drenched market, though this one in particular offers discrete lessons about the pitfalls of investing in retail stocks. What brought down JB was “irrational” competitive pricing and “errant” behavior by other actors in its space, while analysts also note the potential threat of deflation and its impact of earnings upside down the road.

Harvey Norman Holdings Ltd (ASX: HVN, OTC: HNORY), for example, shed nearly 7 percent, as the product lineup for its retail electronics arm is similarly high-priced and its promotional activities are likely to leave it with compressed margins and results at least as disappointing as JB’s. Harvey Norman, it’s yield pushed north of 6 percent on Friday’s selloff, is a hold.

JB has relatively little debt and nothing major maturing before 2014. It generates sufficient cash to fund its growth plans in the short term as well as its dividend. Its time as a reliable dividend grower, ephemeral anyway because of its dependence for longevity on consumers whose tastes change, as a matter of course, appears to be over. JB’s warning may have significance for big-ticket retailers, the sign of what could be a short- to medium-term behavioral change for Australian consumers brought about by significant changes taking place at the global macroeconomic level. But that’s too big a question for this space, right now.

The damage has already been done to the share price, but this is not a falling knife we’re about to grab, particularly upon first introduction. We’re initiating coverage at an unfortunate time for JB Hi-Fi, a hold for investors who already own it.

David Jones Ltd (ASX: DJS, ADR: DJNSY) is another retailer that’s gotten creamed, but its demise has played out over the second half of 2011. There are financial highlights–the company generated free cash flow of more than AUD100 million in fiscal 2011, while net debt is just AUD120 million,  or 13 percent of assets. The annualized dividend of AUD0.28 for fiscal 2011, down from AUD0.30 in 2010, made for a payout ratio of 85.9 percent, in line with management’s payout policy of “not less than 85 percent” of net profit after tax.

The stock is currently yielding more than 10 percent, even after the 6.7 percent year-over-year reduction. DJs, as its know colloquially Down Under, cut its final dividend from the 2010 level of AUD0.18 to AUD0.15, after boosting the fiscal 2011 interim dividend slightly. The cut in the final dividend was the first since 2002, following eight straight years of increases.

There are issues with DJs apart from the nature of its operations. The department store, which claims to be the oldest one operating continuously under its original name in the world, is being torn by an internal management problem, as the current CEO is blaming his predecessor for missteps. Management’s presentation to the company’s recent annual general meeting was thorough but downbeat, and there’s AUD129 million drawn on a credit line that has to be rolled over next September. That’s about 10 percent of market cap.

The siren of a 10 percent-plus yield is strong. But equally strong are the warning signs: Just one analysts following the stock rates it a “buy” at present, while nine say “hold” and eight more advise investors to “sell.” On top of that insiders are selling the stock. David Jones weathered the scrutiny brought on by JB’s troubles. But though the department store retailer is a different beast than JB, it’s a beast nonetheless. David Jones is a hold for investors who own it.

At the Movies

Generally speaking, retail stocks aren’t the best way to build wealth over the long term if you’re trying to do it with dividends, whether based in the US, Canada or Australia. There are exceptions, however.

By 1930, innovations in the form, including the introduction of sound and music, evolution of editing techniques, and the use of film to dramatize and romanticize outlaws, was drawing 65 percent of the US population–about 80 million people–to the cinema on a weekly basis. Studio moguls had levered up during the ’20s, leaving themselves overextended and exposed when the brutal early years of the Great Depression saw unemployment soar above 20 percent and movie attendance fall by about 40 percent.

It was only after about five years of suffering along with every other industry that movie-making turned a corner during the 1930s. A combination of savvy marketing moves–including a drastic reduction in ticket prices–and an era of creative brilliance drove box office totals to new records, and American movies reached a peak once more, drawing nearly 60 million viewers per week between 1942 and 1946.

Ever since the movies has enjoyed a reputation as a recession-resistant business.

But movie attendance in North America has been in slow, steady decline ever since the golden age of cinema in the 1940s, challenged first and most formidably by television. By 2000 just 27 million people–9.7 percent of the US population–had attended the cinema on a weekly basis.

As it seems with everything these days, the action is overseas. Worldwide box office for all films released in each country around the world reached USD31.8 billion in 2010, up 8 percent over 2009’s total, boosted by box office increases in markets outside the US and Canada. International box office (USD21.2 billion) made up 67 percent of the worldwide total, a slightly higher proportion than in previous years. International box office in US dollars is up more than 30 percent over five years ago.

In 2009, amid the Great Recession, North American box office increased 6 percent to 1.42 billion admissions, the best year-over-year increase since 2002. And the category of “frequent moviegoers” increased to 11 percent of the population in 2010, or 35 million people, up from 32 million in 2009. “Frequent moviegoers” drive the industry, accounting for more than 50 percent of ticket sales.

It would be easy to lump these statistics in with general arguments about how working people can afford stuff like movie tickets versus undefined but presumably more expensive forms of entertainment during economic downturns. The fact is, however, that there is no data to support the proposition that the competition for the entertainment dollar is a zero-sum game, in good times or bad.

It’s important to return to another reason we remember the 1930s: It was a golden age for film-making, featuring form-defining popular classics such as The Public Enemy, Top Hat and Gone with the Wind. In addition to making cinema accessible to cash-strapped working people, studio heads also served up high-quality entertainment to put and keep people in theater seats. Working people have discerning tastes, too.

It’s likely that North American movie theater attendance would have declined even further since its recent 2002 peak at 1.57 billion admissions but for the era of the epic series’ defined by the Harry Potter films. These films, and others, such as the Lord of the Rings trilogy and the recent spate of superhero updates, incorporate new technologies that make the big-screen experience a critical part of the story. The star power–Fred Astaire and Ginger Rogers–that carried Top Hat, in other words, has given way to technical prowess, represented best by a film that isn’t part of a series but is as definitive of the era, 2009’s Avatar.

In fact data suggest the 2009 attendance bump had more to do with James Cameron’s latest epic than with the relative affordability of a movie ticket in tough times. Generally speaking, making money in movies is still all about a quality entertainment experience.

We’ve done very well in AE’s sister letter Canadian Edge with movie theater operator Cinplex Inc (TSX: CGX, OTC: CGXPF), which has more than 1,000 screens in the Great White North. Cineplex has found ways to monetize its screens during non-peak movie attendance hours, such as offering space for corporate events, and has also been innovative in its approach to letting screen space for advertising. It’s among the most technically advanced theater operators in the world, as it’s invested heavily in upgrading to 3D and IMAX capabilities, which promise higher-margin box office.

In other words, Cineplex has done everything it can to diversify its revenue mix within the reasonable confines of its basic mission, and it’s done it well. Movie-going is a cheaper alternative to attending professional sports matches, for example, but nevertheless providing a quality experience counts.

At the same time building in offsets to potential drags on box office is key to making movie-theater operation a worthwhile investment.

Sydney-based Amalgamated Holdings Ltd (ASX: AHD, OTC: AMGHF) has managed to complement its 1,000-plus movie screen theater interests in Australia, New Zealand and Germany with hotel operations, a consistent mix that establishes it as a global leisure services provider.

Net profit after tax (NPAT) for fiscal 2011 (ended Jun. 30, 2011) was AUD139.8 million, up 42 percent from AUD98.8 million in 2010. The increase was largely the result of the sale of Amalgamated’s movie-theater interests in the United Arab Emirates, which netted a profit of AUD60.3 million. Profit before one-time items was AUD102.3 million compared to AUD118.3 in fiscal 2010, which was punctuated, of course, by Avatar.

Growth in average room rate on the hotel side of the business was around 3 percent in fiscal 2011, though occupancy was off slightly because of reduced leisure time in Australasia on account of ill weather, a strong dollar sending Australians overseas and a generally weaker economy.

Australian cinemas, however, held market share and Amalgamated enjoyed the continuing impact of 3D films at the box office; like Cineplex Amalgamated has a proportionally higher share of its screens devoted to the super-snazzy, higher-margin technology. Box office in New Zealand was similarly soft, while Germany suffered the additional impact of competition from global football’s World Cup in the summer of 2010.

Profit before tax for the first three months of fiscal 2012 was AUD45.7 million, an increase of 4.3 percent over the comparable period; ex items year-over-year growth was 10.2 percent, as German exhibition has rebounded sharply. Hotel operations have suffered amid the current economic uncertainty, as the main Thredbo ski resort saw a 16.8 percent year-over-year earnings decline.

During its annual general meeting in mid-October management, because of the uncertainty surrounding many of the world’s economies, declined to offer specific guidance for the remainder of fiscal 2012. Managing Director David Seargeant did point out, however, a strong film lineup on the horizon–including Tintin, Sherlock Holmes: A Game of Shadows, Mission: Impossible: Ghost Protocol, The Girl With the Dragon Tattoo and Alvin and the Chipmunks: Chipwrecked–improving conditions in Germany and a potential return to health for the hotel industry in noting that Amalgamated is “well positioned to continue to meet challenges.” During the three years that have come to mark the global financial crisis Amalgamated was able to expand market share, completing acquisitions totaling AUD211 million.

For fiscal 2011 the board declared a final dividend of AUD0.23 per share as well as a special dividend of AUD0.04 per share. The total annualized dividend of AUD0.41 per share was up 11 percent over fiscal 2010, the 10th straight year of dividend growth.

Operating cash flow was AUD139.7 million in fiscal 2011, up from AUD136.6 million, as lower revenue from its cinema exhibition segments in Australia and Germany were more than offset by revenue from real estate operations as well as a tax refund in Germany. Cash and cash-like instruments were AUD115.6 million at the end of fiscal 2011, while the company had total debt outstanding of AUD47.4 million. Amalgamated has approximately AUD270 million of credit facilities maturing Jul. 10, 2012, on which, as of Jun. 30, 2011, AUD46.3 million was drawn. Management has begun negotiations for new credit facilities.

A solid player in an industry capable of generating significant cash flow, Amalgamated Holdings is a buy under USD6.