Why are ASX retail giants tumbling? What’s next for Wesfarmers and Woolworths?

Last week, mounting concerns over an economic recession were reaffirmed by the lacklustre retail sector in the US which hit investors with more pain and pushed the S&P 500 to the brink of a bear market. Australia's retail shares were not an exception. Many of the sector's most prominent players lead the sell-off. The new week ahead may bring more surprise to the industry and the market as more household names are due to report their earnings, including Costco, Best Buy, and Macy's.

Wesfarmers

The Wesfarmers share price is the sector’s worst performer, recording a 6.31% weekly fall and reaching its lowest level since October 2020. Wesfarmers is the owner of Bunnings, Kmart, Target, Officeworks, and the online site Catch.com. While the multiple fronts are often taken as a major competitive advantage for the group, the tough times haved turned the strength into a bittersweet burden.

One of the major problems for Wesfarmers is the Catch Group, which was acquired for $230 million before the start of COVID lockdowns. While the two-year battle with the virus has initally delivered a boom for online retail operators, its earnings before tax (EBT) remains to stay in the red zone with $43-45 million loss for the six months leading to December 31, 2021.

The concern for this sector is mounting as surging inflation is compounded with fading demand, acerbating the downtrend. Similar worries are spreading to Kmart, which reported a glass-dropping 63.4% shrink in earnings for the same period.

According to the daily chart, a boost from last Friday’s ASX jump has brought the price back to the $47 mark. However, as long as the $47.80 (representing the March and April low) level isn’t exceeded, the long-term downtrend remains in play with the descending trend line (in the weekly chart) intact as significant resistance power in the near term. On the flip side, current support sits at 45.88, which, if broken through, could see the price pulled back to the lowest level in 20 months.

Woolworths

While suffering headwinds across the industry, Woolworths has proposed to acquire a majority hold in ASX-listed online marketplace MyDeal.com.au. The supermarket giant has offered MyDeal shareholders $1.05 per share, a nearly 60% premium on its recent price.

The top household name in Australia is looking to enhance its marketplace capabilities through the coverage of MyDeal. If Woolworths’ proposition is successful, the new addition will also help Woolworth complement its weakest link, BIG W, the only sector to report a decline in sales in the recent earnings.

Woolworths share price has broken through the two-month long trend line, with the Relative Strength Index flatting in oversold territory, reflecting the extreme weakness in buyer’s sentiment. The bearish pressure may grow further if the prices keep moving towards the floor level, below $35, as seen back in mid-February. On the other side, the 100-day moving average should be the imminent target for the supermarket giant to strike for.

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