Reporting season preview: Retail Sector
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 05 August 2015, 12:24 PM
- Sectors Covered:
- Consumer Discretionary, Industrials & Developers
We expect a relatively upbeat reporting period from most companies in
the consumer discretionary sector given more conducive consumer conditions in the second half and housing
still a major tailwind for some.
We identify plenty of strong investment
opportunities, but retain a Neutral sector stance given the materially lower
AUD will have a meaningful impact on pricing and margins for most retailers
Our predictions for positive earnings surprise this reporting season
include: Domino's Pizza (DMP), Adairs (ADH) and Beacon Lighting (BLX).
Candidates for negative surprise include: Automotive Holdings (AHG).
Foreign exchange impact
Given the sharp fall in the AUD, all retailers will have to address their approach
to offsetting the cost inflation. Given hedging arrangements, 1H16 will be the
first period to see meaningful COGS inflation.
The ultimatum is to lift prices or
face severe margin pressure.
Effective pass-through of price increases while
consumer confidence remains fragile will be a difficult proposition in our view.
The vertically integrated retailers will feel the brunt of the currency hit first but
are also arguably best placed to manage the process.
Ultimately, all will be
impacted one way or another. Burson Group (BAP) looks best placed to effectively pass the
increased costs on to its customers, while Lovisa (LOV) is also well placed given its
quantum of offshore earnings (translation benefit) and high GM.
Key picks in retail
In a sector that will be impacted by the falling AUD, we stick with the retailers
who are best placed to deal with the cost inflation. We are also mindful of the
potential for the strong housing tailwind to ease in the future. Our top picks
Adairs (ADH) and Lovisa (LOV)
Lovisa (LOV) and Adairs (ADH) will produce their first results since IPO.
We expect LOV will
meet its prospectus forecasts. The stock looks fair value at current levels based
on growth projections in existing markets. However, expansion into a major
northern hemisphere market would see significant earnings and valuation
We believe ADH's FY15 result will surpass prospectus forecasts, the
quantum of which may surprise the market.
Burson Group (BAP)
We see strong upside in this name and clear
catalysts ahead (WA expansion, stronger than
expected cost synergies from MAH and the base
BAP business continuing to trade very well).
Domino's Pizza (DMP)
We believe DMP will exceed its FY15 guidance
(32.5% NPAT growth), provide a strong trading
update (particularly from ANZ with the GPS tracker to
impact) and set growth guidance in line with the
street (>20% growth).
We suspect the market will be
surprised by how quickly margins ramp up from here.
Acquisitions remain the key swing factor which we
believe will just be a matter of time. With the above in
mind, we see the stock going higher (potentially
significantly) over the next six months.
Super Retail Group (SUL)
SUL is an interesting investment proposition currently
with the capex intensive period now behind it and the
resulting cost benefits yet to be realised. We expect
FY15 consensus forecasts to be met.
importantly, FY16 consensus forecasts look
achievable providing WOW is on track for its
expected A$5m EBIT reversal.
While the DCs remain
a key operational risk, any early extraction of cost
savings in FY16 (eg commencement of multi store
deliveries) would result in earnings upside and price
Morgans clients can access my full reporting season preview on the consumer discretionary sector, with further detail on changes to my forecasts, trend data and more insights on Adairs. If you are interested in finding out more, please contact your nearest Morgans office.
Disclaimer(s): Analyst may owns shares in some of the companies mentioned.
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.