Retail: Large liquid leaders best placed & back in the zone

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
03 March 2020, 10:40 AM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

We review reporting season across our retail coverage. Our over-arching sector preferences shift to quality, liquid, more defensive stocks given current macro dynamics and a potential negative impact on consumer demand/spending. We have shifted some recommendations accordingly.

On balance, reporting season for our retail coverage was no worse than feared, although the usual divergence in growth persisted. The best results (which resulted in positive EPS revisions for the right reasons) came from: Adairs (ASX:ADH), Bapcor (ASX:BAP), and JB Hi-Fi (ASX:JBH).

Like-for-like sales growth was fairly resilient despite external factors such as bushfires, suggesting the consumer is reasonably well placed vs the pcp. Online continues to contribute a bulk of the LFL sales growth which comes at a higher cost to serve.

As expected, gross margin pressure was evident across the board due to FX headwinds that look set to continue into FY21 with the AUD/USD at c65c. Om response, prices have been lifted across most categories. Opex investment was also more evident in the half (bench-strength, IT/systems, supply chains).

AASB16 is causing issues with consensus comparisons and trading valuations. We expect this standard change to cause further earnings volatility given limited access to leasing books/WALEs. It is a non-cash impact, but creates 'noise'.

We probably haven't heard the last of the coronavirus impact on stock availability across our retailers, given limited information was available to companies at the time of results. Every retailer is in the same boat, although those with private label/fast fashion/higher stock turn models will likely be the first impacted.

Those with more of a domestic, wholesale supply base could be more insulated in the short term. Our recent feedback suggests Chinese factories (outside Wuhan) are back up and running to some extent – although an obvious backlog remains.

The next potential extension from the coronavirus is an impact on actual demand (ie the impact on global economic growth, recessions, etc) and how much pressure this places on discretionary income. Clearly central banks will likely attempt to buffer any resulting economic impact via fiscal stimulus which is looking more and more likely. However, we still see a rising risk to domestic discretionary income/spend.

In this report below, we change the following recommendations: Domino's Pizza Enterprises (ASX:DMP) (to Add from Reduce), JB Hi-Fi Ltd (ASX:JBH) (to Add from Hold) and Accent Group Ltd (ASX:AX1) (to Hold from Add) (Morgans clients can login to view detailed reports and price targets).

More information

Morgans clients can login to view our detailed retail sector update, or more generally browse all our research. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: Analyst may own shares.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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