Consumer spending conditions have clearly softened since September.
The causes have been the softening housing market and equity market volatility (wealth effect), political uncertainty (two major elections in 2019) and spiking fuel prices (although these have rolled off materially since late November).
Over the past few years, the market/consensus has been highly cautious on retail trading conditions over the key Christmas trading period, only to be surprised by relatively upbeat results in February. But this time it feels a little different to us.
Clearly the softening housing market is of most concern given its high correlation with household discretionary spending. With the potential for further softening in prices/activity in Sydney (-9.5%) and Melbourne (-5.8%), we remain cautious despite the recent sector de-rate (XDK -18% since peak in Aug vs ASX300 -11%).
The most interesting dynamic is the rise of online sale activity in November (Click Frenzy, Black Friday and Cyber Monday).
Our feedback suggests consumer traction of these events rose significantly this year – so some unchartered territory for retailers to navigate heading into Christmas.
We expect plenty of retailers are currently holding their breath as they gauge how much demand was pulled forward into November and developing margin strategies over the balance of the CY.
We think this poses additional risk this year in terms of margins and fluctuating inventory levels. The strength of these November sales events may also partly explain why October retail sales were quite weak (consumers waiting for the big promotional events).
While trading multiples are to some extent already pricing this in after the recent sector de-rate, earnings risk remains elevated. Investor interest in the sector is low which means the smaller/illiquid names are being dealt with even more harshly and will arguably be the last to recover.
Our stock preferences include:
- Lovisa (LOV) (potential for articulation of the size of international trial markets in the near term which can overshadow benign like-for-like sales growth)
- Baby Bunting (BBN) (market share gains post industry consolidation + defensive product)
- Noni B (NBL) (driven by a relatively low-risk cost-out strategy).
Morgans clients can access the full research note with my retail sector update. Alternatively, contact your Morgans adviser or nearest Morgans office for a copy.
Disclaimer(s): Analyst may own shares in companies mentioned.
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