Macro Intelligence: are ASX-listed retailers a buy, hold or sell?

Article written by Nadine Blayney (ausbiz)

Retail returns

The S&P/ASX 200 consumer discretionary index is made up of companies that sell products to Australian consumers both online and in-store including the likes of Wesfarmers, JB Hi-Fi and Premier Investments (ASX:PMV). Apart from retailers, the index also includes companies such as Aristocrat (ASX:ALL), The Lottery Corporation (ASX:TLC) and Domino's (ASX:DMP).

Year-to-date, the consumer discretionary index (AXDJ) is up 4.93% despite a slowdown in consumer spending. For example, shares of index heavyweight Wesfarmers (ASX:WES) are up 14% since January,JB Hi-Fi (ASX:JBH) shares are up 15% and Aristocrat Leisure (ASX:ALL) shares are up close to 20%.

Index performance chart

However, not all retailers have fared as well as the index titans. Baby Bunting (ASX:BBN) and Cettire (ASX:CTT) are amongst retailers which have downgraded expectations ahead of earnings season, while the likes of JB Hi-Fi, Super Retail (ASX:SUL) and KMD Brands (ASX:KMD), the owner of Kathmandu and Rip Curl, have warned that cost-of-living pressures are negatively impacting consumer spending.

KMD Brands daily chart

Baby Bunting daily chart

Cettire daily chart

The proof is in the data with ongoing weakness in Australian retail sales. Retail turnover rose just 0.1% in April month-on-month or 1.3% on the prior corresponding period. Clothing, footwear and personal accessory retailing fell 0.7% in April, department store spending rose just 0.1%, while household goods retail sales rose 0.7% to $37.7 million. April’s slow sales followed a 0.4% drop in turnover in March.

ABS retail trade chart

The most recent monthly ABS Household Spending index showed discretionary spending rose a paltry 0.6%, driven by increased spending on other services and furniture and household equipment.

ABS household spending chart

Rates Relief?

The Reserve Bank of Australia (RBA) held interest rates steady at 4.35% as expected in June, with a modestly more hawkish statement reflecting its concerns over sticky inflation. The RBA reinserted it “will do what is necessary” to achieve its objective of getting inflation down to its target 2-3% band in a “reasonable timeframe.” At the same time, the RBA acknowledged consumption per capita has been declining “as households restrain their discretionary expenditure and inflation weighs on real incomes.”

Supportive of retail spending and consumption is the Australian jobs market which remains tight. Employment rose by 39,700 in May, above market expectations and bringing the jobless rate back to 4%. However, the demand and pressure on wages created by low unemployment make the RBA’s job more difficult when it comes to cutting the official interest rate. Rates are a blunt tool but one of the only ones in the RBA’s arsenal.

ASX futures chart

It is widely expected the RBA’s next move will be an interest rate cut. Commonwealth Bank of Australia (ASX:CBA) and Westpac (ASX:WBC) economists are expecting the first cut in November 2024; National Australia Bank (ASX:NAB) expects a cut later this year; with the tight labour market in mind, ANZ (ASX:ANZ) is expecting the first cut in February 2025 in line with market pricing. An interest rate cut would bring relief to mortgage holders, though it would likely take some time before families suffering from the rising cost of living and mortgage rates feel confident enough to loosen the purse strings.

Another potential tailwind for retailers comes on 1 July, when the government’s tax cuts come into effect. Any household with children will receive an average annual tax cut of $3,268 in 2024-25, amounting to a weekly tax cut of $63.

Thresholds and respective rates

“I think we're still in the midst of quite a pessimistic consumer. And that's going to make it quite tough for retailers,” McGrath Nichols' Jason Ireland told ausbiz after the latest Westpac consumer confidence data.

“We think that consumer spending might well come back towards the back end of this year, retailers need to be ready.”

Stocks on Sale?

Three retail stocks which have come under a great deal of selling pressure this year are KMD Brands, Super Retail, and Baby Bunting; their share prices are down 52.8%, 13.5%, and 36.4%, respectively.

KMD Brands recently warned it is seeing the prolonged impact of cost-of-living pressures on consumer sentiment globally, but particularly in New Zealand. Its Kathmandu stores experienced a slower than expected start to its key winter period, with sales down 11.5% for the first three weeks of its promotional period. It’s forecasting underlying EBITDA of NZ$50 million vs NZ$105.9 million in FY23.

KMD Brands daily chart

In the wake of the profit warning, Morgan Stanley pointed to a resilient gross margin and tightly controlled operating costs. It has an ‘equal weight’ rating on KMD Brands, with a price target of $0.55 per share.

Analyst recommendations: KMD Brands

Super Retail issued a trading update at the Macquarie Group Conference on 9 May, in which it said interest rates and inflation were making its customers spend carefully and more value conscious. Group like-for-like sales were up 2% for the fiscal year to date, with group sales in March and April up just 1% on the prior corresponding period.

This week UBS upgraded its view on Super Retail, putting a ‘buy’ recommendation and a $15 price target on the stock. UBS expects an improvement in consumer spending in the second half, along with Super Retail’s store growth, online growth and growth in its club membership to drive results. It’s also positive on Super Retail’s efforts to grow customer value.

Super Retail daily chart

In the wake of the update, Morgans said the company's diversified portfolio offers greater resilience to macro trends than peers and says Super Retail's customer loyalty will prove a strong advantage. Morningstar recently said it sees better competitive cost advantages for Super Retail's core auto parts segment, Supercheap, which accounts for half of its earnings. It upgraded its moat rating to "narrow" from "no-moat" and upgraded its fair value estimate to $11.00 per share.

Analyst recommendations: Super Retail

Baby Bunting also warned its profits would be dented by a cautious consumer brought on by cost-of-living pressures. The baby products retailer said it expects FY24 pro forma net profit of between $2 million and $4 million, a sharp drop from last year's $14.5 million profit with January to April sales down 7.7%. Baby Bunting promised another update towards the end of June including trading, FY25 initiatives and strategy for FY25 and beyond.

Baby Bunting daily chart

Macquarie expects ongoing cost pressures and an increasingly competitive operating environment in the near-term for Baby Bunting; it is ‘neutral’ on the stock with a $1.40 price target. Citi is ‘neutral’ on the stock with a trimmed $1.59 price target. Citi is warning of downside risks to forecast if the softness in the baby goods category seen in its trading update continues. Morgan Stanley cut its price target on the stock to $1.70 but maintained its ‘overweight’ rating saying the second-hand market has emerged as a temporary headwind to the business. Ord Minnett, meantime, downgraded Baby Bunting in the wake of the update saying household expenditure will remain under pressure in the near-term; it has a ‘hold’ rating on the stock and a $1.60 price target.

Analyst recommendations: Baby Bunting