Retail stock-take: 1H21 reporting season wrap
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 03 March 2021, 10:30 AM
- Sectors Covered:
- Consumer Discretionary, Industrials & Developers
Consensus upgrades broadly continued for the discretionary retail sector over the 1H21 reporting season, with strong demand continuing while international travel restrictions remain in place and well placed household balance sheets.
The market has been acting rationally towards the sector in our view, with the last several rounds of upgrades not being rewarded/fully reflected in share prices. Investors are clearly focused on seeing how retailers comp the strong 4Qs most are cycling (and 1H22 in particular).
Gross margin wins – most retailers are confident of retaining a decent portion of their recent GM gains, even as stock availability improves. While promotional activity for most will increase in periods to come (although perhaps not to heightened pre-COVID levels), freight costs should ease and the strong AUD creates meaningful tailwinds for most.
Extreme opex leverage – retail management teams continued to manage their cost bases tightly as mini COVID outbreaks continued, causing snap lockdowns. This, on top of incredibly strong demand, GM expansion and JobKeeper for some, saw material operating cost leverage and therefore earnings growth (68% avg EBIT growth in 1H21 for our retail coverage excluding those who have made acquisitions).
2H21 trading updates were strong across the board, with no discernible deceleration in the recent strength in LFL sales growth trends. This was broadly expected off a pre-COVID normal base. 4Q results will be of more interest as an indicator of where sales settle to.
Little formal FY21 guidance was provided across the board which was to be expected, although broad management outlook commentary remained reasonably upbeat. BRG was the only stock to provide formal FY21 earnings guidance.
We continue to forecast declining FY22 earnings forecasts for the COVID winners following a bumper FY21. However, our FY22 forecasts remain materially above FY19 levels (the last clear, pre-COVID reporting period) – on avg 50% above (excl. those who have acquired businesses). This is why we think the market requires evidence that earnings normalise materially above pre-COVID before further re-ratings can occur.
At time of writing, the AUD/USD is 78c. As hedging positions roll, this provides a ~9c+ tailwind compared to previous levels. Those who direct source/have vertically integrated models benefit the most from this (as opposed to those who source a majority of product from local intermediaries).
Outlook for consumption/sector view – there continues to be several consumption tailwinds in place (strong housing, ultra-low interest rates, likely inability to travel offshore in any meaningful way until CY22, likelihood of less snap lockdowns as vaccine rolls out and therefore less store closures and solid household balance sheets/savings). However, the market will likely price a shift in the direction of spending well before it occurs and we are therefore mindful that the sector may remain under valuation pressure until this plays out.
Morgans key picks
- Lovisa (ASX:LOV)
- Universal Store (ASX:UNI)
- Baby Bunting (ASX:BBN)
- Breville Group (ASX:BRG)
- Adairs (ASX:ADH).
We have a clear bias to reopening leverage (LOV, UNI), compounding growth options (LOV, UNI, BBN, BRG) and where valuations simply don't reflect the strength of the business (ADH).
What caught our eye
- Beacon Lighting (BLX) – sizeable opportunity to take meaningful share of the Trade market
- BBN – pushed the rollout button on NZ
- LOV – re-opening of Europe could coincide with rebranding of 90 Beeline stores to Lovisa)
- ADH – Mocka could reach +A$100m of sales in Australia over time vs A$35m today
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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.