MELBOURNE - Times are tough for Australian retailers. A strong local dollar is luring shoppers to chase online bargains from overseas rivals, while relatively high interest rates and falling home and share values mean some are simply spending less.

Department store sales slumped more than 10 per cent in July, the biggest fall in seven years, and latest data show that one in 10 bankruptcies is in the retail trade.

The country's biggest department store chain, Myer Holdings, is expected to say later on Thursday that its second-half profit fell - squeezed by online shopping and global rivals such as Zara, Topshop and Gap Inc expanding on its home turf.

Myer has already warned its full-year net profit could be down by as much as 15 per cent, and analysts on average forecast net profit will fall another 5 per cent in the year to next July.

Australia's economy, helped by a once-in-a-century mining boom, has withstood the global slowdown better than most, but its strong currency is encouraging shoppers wielding tablets and smartphones to hunt down bargains overseas. Australian retailers are having to offer discounts to keep up.

Jangled nerves

Even as the economy grew 3.7 per cent in the last quarter from a year earlier and unemployment hovers near just 5 per cent - strong by developed country standards - consumers remain in a funk over Europe's debt crisis and slower growth in the United States and China.

The Reserve Bank of Australia (RBA) held interest rates at 3.5 per cent this month, but markets are pricing in a rate cut as soon as October. Easings in May and June, however, were not fully passed on by banks to those with loans, and did little to boost retailers' takings.

"It will take a longer period of global financial stability to calm the jangled nerves of Aussie shoppers," said Savanth Sebastian, economist at CommSec.

"People are more inclined to save their money rather than spend it at discretionary retailers ... and you've got the structural shift towards online," noted Simon Bonouvrie, portfolio manager at Platypus Asset Management.

Since early 2009, sales volumes at department stores have declined by around 6 per cent, RBA Deputy Governor Philip Lowe said, in part as online sales make pricing more transparent.

"Many Australians have worked out that prices charged by domestic retailers for certain goods are higher than those charged by overseas online retailers. This is causing a rethink of business models, and retailers are having to make changes to the way they run their businesses," Lowe has said.

Global trend

Myer's closest rival David Jones Ltd said its same-store sales dropped 1.3 per cent in the fourth quarter, and has warned that second-half earnings could fall by up to 40 per cent as it invests in a costly overhaul.

Possibly adding to the woes of retailers was what Lowe described as a shift in household preferences from goods to 'experiences', reflected in higher spending on recreational activities and travel.

Myer and David Jones are part of a global trend that has seen department stores particularly hard hit. British retailer Marks & Spencer slashed its sales growth forecast earlier this year and invested less in selling space due to the growing popularity of online shopping. Sears Canada Inc last month reported a wider loss as sales dropped.

Retailers dominate the 10 most heavily shorted stocks on the Australian bourse, and data from independent research firm Zenith Investment Partners shows 8 of the top 10 short interest stocks over the past year are consumer discretionary stocks.

'Cautiously pessimistic'

Myer is among the cheapest in about 60 stocks in the global multi-line retail sector on a forward price to earnings multiple, and ranks highest for dividend yield, at about 11 per cent.

Myer shares, valued at just over US$1.1 billion, hit a life low of A$1.54 (S$1.98) in late-June and closed on Wednesday at A$1.845.

While sales were boosted by government hand-outs in May and June, and Myer has trimmed its discounting to improve returns, analysts still expect the company's second-half earnings to have fallen 5.6 per cent to A$50.8 million before one-off items, according to a survey of five analysts.

For the year to July 2013, analysts predict Myer's net profit will fall to A$131.1 million.

Australian consumer confidence edged higher this month, according to a survey published on Wednesday by Westpac and the Melbourne Institute, although the measure of whether it was a good time to buy a big-ticket household item slipped.

"The consumer is clearly stuck in an extended 'cautiously pessimistic' phase," said Westpac chief economist Bill Evans.