Investor spotlight: retail resilience, cautious consumer

Australian retail has been resilient but the outlook is dim. In this week’s Investor Spotlight, we look at the Australian retail landscape and discuss three consumers to watch.

Retail is resilient but the outlook is weak

Australia’s retail sector has proved remarkably resilient. Owing to a historically tight labour market, ample household savings, and high levels of household wealth, consumption in Australia has remained strong.

This is despite the stubborn cost of living pressures and the RBA’s aggressive campaign of interest rate hikes, which has sapped consumer sentiment in the past 12 months.

Retail Sales in Australia have been strong in recent months, even accounting for the effects of price growth on the data and seasonality.

Furthermore, according to the most recent set of national accounts released by the ABS, although consumer spending moderated in the fourth quarter of 2022, it remains significantly above trend.

Three consumer stocks to watch

• Domino’s

In the most recent reporting period, Domino's results were amongst the most disappointing. Its shares dropped by more than 20% on the day as the company flagged persistent cost pressures, weaker demand as households curb spending, and lower margins as consumers opted to pick up their orders rather than have them delivered.

The analyst community is forecasting a -12.59% drop in earnings for the company in the 2023 financial year, with Domino’s holding a consensus “hold” rating amongst brokers. The stock does boast a consensus price target above the current market price at around $62 per share.

The technicals look poor for Domino’s shares with the stock nearing its pandemic lows. Technical support is at $50, a break of which could open a drop to $40. A confluence of resistance levels appears around $60.

Domino's weekly chart

• Harvey Norman

Harvey Norman was another company punished following its recent results. While going to pains to emphasize the growth the company has experienced since the beginning of the pandemic, Harvey Norman missed earnings estimates and flagged further discounting on expectations of weaker economic conditions.

Analysts are forecasting negative revenue and earnings growth for the foreseeable future, with brokers slapping a “hold” rating on the stock, despite the share price trading at a slight discount to the consensus price target.

Harvey Norman shares remain in a downtrend and remain slightly above eight-month lows. Support looks to be around $3.60 and resistance at $3.90, with a break of the latter potentially opening a push above $4.00.

Harvey Norman weekly chart

• JB HiFi

JB Hi-Fi’s interim results revealed solid growth in revenues and profits, with the numbers coming in line with expectations. However, the business delivered cautious guidance and warned of future discounting, as discretionary spending wanes in the Australian economy.

Analysts expect a halving of earnings in the next half, and negative EPS growth until 2025. The company possesses a hold rating amongst brokers.

JB Hi-Fi shares look rangebound in the bigger picture. The stock is currently oscillating around its 200-week moving average, with drops below that level often bought by investors.

JB HiFi weekly chart