Macro Intelligence: are ASX-listed retail stocks a bargain?

Article written by Nadine Blayney (ausbiz)

Spending slows

Australian consumers are well and truly feeling the pinch as cost of living pressures remain high, following 13 interest rate hikes from the Reserve Bank of Australia.

Retail sales spending dropped 0.4% in March, according to the Australian Bureau of Statistics (ABS), with clothing, footwear, and accessory retail sales falling sharply as the glow from Taylor Swift’s tour evaporated.

How retail turnover fared month-over-month

“Retail sales volumes fell for the fifth time in the past six quarters as consumers cut back on buying large household items such as furniture and electronic goods. “The only rise in volumes over the past 18 months was the December quarter last year as extensive discounting from Black Friday sales boosted volumes,” said Ben Dorber from the ABS.

In April, the Commonwealth Bank’s Household Spending Insights data showed a “significant” overall decline, with a 1.1% pullback in retail spending and a 4.4% fall in spending on discretionary items. The good news for consumers was that the Reserve Bank of Australia kept interest rates steady at 4.35% at its May meeting. However, the bad news is that inflation remains sticky, and the big four banks are not expecting an interest rate cut until at least November.

Discretionary vs. essential: diverging consumer spending patterns

Given the impact of rate rises on disposable income, in its most recent monetary policy statement, the RBA noted weak growth in household consumption as households curb discretionary spending and maintain savings.

While it expects consumption to grow later this year as real incomes stabilise, it warns that, “...there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market.”

Profit downgrades reveal retail spending chill

Despite the slowdown in spending, the S&P/ASX 200 consumer discretionary index has risen 6.37%, compared to the broader S&P/ASX 200 index, which is up 1.30% year to date.

Intraday rally in Australian consumer stocks

However, since the retail sales data, the RBA’s rate decision, and downgrades in the sector, the consumer discretionary index is under pressure. Performance at an index level also masks some of the poor performance in stocks most leveraged to the slowdown in retail spending.

Bapcor (BAP), which sells car parts and accessories, recently downgraded its full-year profit expectations, pointing to a decline in the performance of its retail business due to weak consumer confidence and lower levels of discretionary spending.

Australian consumer stocks retreat after rally

Bapcor daily chart

• Baby Bunting (BBN)

Baby Bunting (BBN) also downgraded its profit expectations and is now expecting FY24 pro forma NPAT between $2 million-$4 million. “We’re actively aware that our customers are more sensitive than many other groups to cost-of-living pressures and are managing their spending carefully,” said Baby Bunting CEO Mark Teperson.

Baby Bunting daily chart

• JB Hi-Fi (JBH)

JB Hi-Fi (JBH) recently issued a sales update, warning of a “challenging and competitive retail market.” Total sales dipped 0.1% for the first quarter, with comparable sales down 0.3%.

JB Hi-Fi daily chart

• Temple & Webster (TPW)

Online furniture retailer Temple & Webster (TPW) shares were sold-off the day it issued a trading update, despite reiterating its full-year guidance range of 1-3% EBITDA, and reporting “strong” trading from January through to May, proving how sensitive the market is to discretionary retailers.

While Accent Group (AX1), Adairs (ADH), Dusk (DSK), and Kogan (KGN) have not issued downgrades, their share prices are under pressure.

Accent Group daily chart

Adairs daily chart

Dusk daily chart

Kogan Australia daily chart

Grab a bargain?

So, is it time to buy beaten-down retail stocks?

“High migration, high employment levels, and also the tax cuts coming on the 1st of July,” Marcus Bogdan from Blackmore Capital told ausbiz. “These are all things that have continued to underpin the consumer.”

Despite the company’s downgrade, Macquarie has an 'outperform' rating on Bapcor (BAP), saying it remains a quality business with a strong competitive position. In the wake of its downgrade, Macquarie analysts say its valuation discount has widened further, making it an M&A target. Noting tough retail trading conditions and higher competition, Macquarie lists cost cutting, new management, and a takeover as possible share price catalysts.

Analyst recommendations: mean rating and price target

Analysts downgrade Baby Bunting as profit woes mount

In the wake of the Baby Bunting profit downgrade, Citi retains its ‘neutral’ rating on the stock while lowering its price target to $1.59 per share. It says that while there are signs of promise from its turnaround plan, earnings will likely remain under pressure without an improvement in Baby Bunting's key demographic.

Ord Minnett downgraded the baby retailer to ‘hold’ from ‘accumulate’ and cut its price target to $1.60 from $2.00 per share, based on its expectation that household spending will remain under pressure.

Macquarie cut its EPS estimates for FY24 and FY25 and reduced its price target from $1.75 to $1.40 following its bleak FY24 forecast. The current consensus recommendation, according to Refinitiv data, is a ‘buy’.

BAP and industry analyst recommendation trends

Analysts divided on JB Hi-Fi's shine amid cost-of-living clouds

After its trading update, JB Hi-Fi was upgraded to ‘overweight’ from ‘neutral’ by J.P. Morgan, and its price target was lifted to $63.00 per share. Analysts say the earnings outlook is solid as cost control remains a focus, adding that management displays strong operational execution. They also point to favourable trends in computing and telecom product categories.

Morningstar is a bit more cautious on JB Hi-Fi, saying that while tax cuts and wage increases will improve tight household budgets, cyclical retailers like JB Hi-Fi are more exposed to the upside. However, it suspects the market is expecting a much more pronounced recovery. Morningstar maintains a fair value estimate at $37.50 per share, with the stock currently screening as ‘overvalued.’

Analyst recommendations: mean rating and price target

Temple & Webster's growth path

On Temple & Webster, UBS points to increasing competition and market saturation as being negative for future earnings growth expectations. It lowered its earnings estimates and cut its price target to $10.30, maintaining a ‘neutral’ rating on the stock.

In contrast, Morgan Stanley called the trading update “strong” and pointed to a 4% increase in market share; it has an overweight rating on the stock with an unchanged $12.25 price target.

UBS and industry analyst recommendation trends