Retail: Stock take... weighing up current dynamics

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
06 February 2020, 12:15 PM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

Despite a couple of sector downgrades in January, we are broadly expecting in-line results from the rest of our specialty retail coverage (albeit a greater proportion of 2H growth skews this year). We think consumer conditions are more supportive than this time last year, although impacts from events such as bushfires/coronavirus can dent short-term spending/trading conditions.

We think trading updates will be ‘ok’ with the likelihood of some indirect bushfire impact (depending on category/regional exposure). Outlook commentary will likely caution on potential inventory/stock availability issues if the coronavirus impact extends (heading into the key 4Q trading period) and the persistently weak AUD. 

Most of our retailers source a majority of product/inventory from China. Our current understanding is that most factories have been asked to remain closed for 1-2 weeks post Chinese New Year (CNY) and even to the end of Feb for some.We think this quantum of delay could be handled by most of our retailers with limited fallout (part of disaster recovery strategies). However, any persistent factory closures (ie ≥ one month post CNY) has the ability to impact stock availability and therefore earnings. Like the bushfires, any impact can’t be capitalised (demand likely to be simply pushed into FY21), however we must highlight potential impact in the short-term.

While sourcing of product from China is constant, the next major intake period (for the 4Q trading period) will be April/May (therefore requiring stock to be in-transit late March). Clearly the peak coronavirus outbreak commenced over the Chinese New Year period when factories are closed, however the ability for workers to return to factories in coming weeks will also be key. Those with higher stock turns/tighter inventory positions/fast fashion models could obviously see a greater impact in the short-term, depending on the duration/severity of the virus.

We are conscious that some trading valuations are elevated and therefore so are expectations. Our retail coverage universe is currently trading on 15.7x next-12 months PE and 4.4% yield. 

The avg 3-year forward EPS CAGR within our coverage is ~8%, with the strongest growth forecasts coming from Baby Bunting (BBN) (22% 3-yr CAGR) and Lovisa (LOV) (20% 3-yr CAGR).

Those cycling a strong base in Jan/Feb include: Super Retail Group (SUL) (BCF/Sports), Adairs (ADH) and Baby Bunting (BBN).Those cycling a weak base include: JB Hi-Fi (JBH), Beacon Lighting (BLX) and SUL (Macpac). 

In this report we lift our rating on Bapcor (better valuation) and lower our rating on Motorcycle Holdings (2QFY20 national motorcycle sales growth moderated vs 1QFY20). We make no changes to forecasts. 

Key picks include: Adairs, Baby Bunting and Bapcor.  

More information

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Disclaimer: 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.

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