Retail Sector: Would you like that wrapped? Review of the 1H22 reporting season
About the author:
- Author name:
- By Alexander Mees
- Job title:
- Co-Head of Research and Senior Analyst
- Date posted:
- 10 March 2022, 10:00 AM
- Sectors Covered:
- Gaming and Retail
- On average, our universe of retailers beat our 1H22 EBIT expectations by 5.7%. The clear outperformers were Lovisa (ASX:LOV) and JB Hi-Fi (ASX:JBH). Only four companies missed our forecasts (Step One Clothing (ASX:STP), Adairs (ASX:ADH), Super Retail Group (ASX:SUL), Accent Group (ASX:AX1)) but all were within 5% of our estimate.
- On a median basis, we reduced our EBIT estimates by (0.6)% in FY22 and inched them up by 0.1% in FY23. The biggest cuts were to The Reject Shop (ASX:TRS) and AX1. By far the largest upgrade was to LOV, although there were reasonable upgrades to Baby Bunting Group (ASX:BBN) and Breville Group (ASX:BRG).
- We prefer stocks that are able to deliver growth independent of the likely waning of consumer sentiment and spending. Our three top picks are BBN, LOV and Universal Store (ASX:UNI).
Five talking points post-reporting season
Inflationary pressures will affect consumer spending
A key concern driving the negative performance of retail stocks since the start of 2022 has been around inflationary pressure and its effect on consumer sentiment and spending. Higher
lending rates and, more recently, the dramatic spike in the price of crude oil is likely to weigh on retail spending in the months ahead. It must not be forgotten, though, that household savings expanded significantly during the pandemic and remain well above historical levels.
Gross margins appear to have peaked
The pandemic was a golden era for gross margins in the retail sector. A combination of positive LFL revenue growth, favourable hedging contracts and reduced stock availability leading to a reduction
in promotional activity pushed gross margins up during FY21. In some cases, the momentum carried through into 1H22 but we expect margins to slide in 2H22.
Retailers are prepared to use price as a mitigating tactic
During reporting season, many consumer businesses discussed the willingness to use product pricing as a mitigant to the cost inflation they are experiencing. The effectiveness
of doing so is a function of consumer expectations and visibility around price.
The opportunity for accelerated rollout or TAM expansion
In an environment of waning consumer confidence, the winners in the retail space are likely to be those that can achieve profitable growth through the expansion of their network (or
digital presence) or a move into adjacencies that increase the size of their total addressable market (TAM).
In our opinion, LOV is the best exponent of this dynamic but we also saw accelerated expansion plans discussed by AX1 and UNI
Building (and maintaining) an inventory buffer
Many consumer businesses have worked hard to rebuild inventories depleted over the course of the pandemic. This has largely been achieved despite the ongoing challenges of the global supply
chain. Several companies have expressed a desire to maintain an inventory buffer of elevated stock that will allow them to protect themselves against future supply chain disruption.
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