Retail Sector: Would you like that wrapped? Review of the 1H22 reporting season

About the author:

Alexander Mees
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 among others.

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.

Retail Sector 1H22 Reporting Season Results

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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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