Macro Intelligence: will more RBA rate cuts save Australian retailers in 2025?

Written by Juliette Saly

Earnings season

In this week's edition of IG Macro Intelligence, we take a look at how cost of living pressures are showing up in ASX listed companies' earnings results.

Rate relief?

The CEO of one of Australia's largest retailers has indicated further interest rate cuts are needed to boost consumer confidence in the face of continued cost of living pressures.

Wesfarmers CEO Rob Scott welcomed the Reserve Bank of Australia (RBA) February cut, but indicated it will take more to 'fundamentally change consumer sentiment.'

The retail conglomerate is expected to be a beneficiary of the RBA's first rate cut since the pandemic, as lower mortgage repayments boost disposable income.

Wesfarmers has cited strong trade across all its retail divisions in the first six weeks of the second half, after posting a near 3% rise in first-half profit, which saw it able to boost its dividend.

Wesfarmers reporting results

However, the Bunnings and Kmart operator has flagged domestic cost pressures are likely to persist, driven by labour, energy and supply chain costs, as well as weakness in the Australian dollar.

'We've demonstrated through Kmart, Bunnings [and] Officeworks that we can find ways to try and mitigate some of these cost pressures because what we will be doing is doing everything we can to keep our prices low because of our everyday low price strategy,' said Rob Scott.

'But I think we do need to be mindful that the lower Australian dollar, although it's good for a lot of our exports, will potentially create some inflationary pressure.'

Chicken dinner

Despite cost of living pressures impacting consumers' disposable income, both the CEOS of wholesale chicken supplier Inghams and fast-food restaurant Guzman y Gomez are upbeat, saying people need to eat.

When it comes to those numbers…The food retailer's global sales increased 23% in the first half to $578 million, across 239 restaurants in Australia, Asia and the US. Guzman y Gomez is expecting to exceed its FY profit forecast, and has seen Australian comparable sales growth rise 12% in the first seven weeks of trading. Guzman y Gomez is also planning on opening 31 new stores, although its penetration into the key US market remains challenging.

'I'm not an economist, but people have to eat. They want high quality food at value, at convenience and Guzman y Gomez does it better than anybody else,' said Guzman Co-CEO Steven Marks. 'If the economy is strong or weak, people are coming to GYG because it's high quality food, great value and great convenience. And obviously you can see it in our numbers.'

US sales were down almost 13% in the period, while its overall underlying EBITDA loss sank 62% to $5 million.

Guzman y Gomez reporting results

Wholesale chicken supplier Inghams is equally upbeat.

Its first half profit declined 19% to $51.5 million, missing market expectations. The result reflected a decline in core poultry volumes as Inghams transitioned to its new supply agreement with Woolworths.

'This week's rate cut was encouraging. It's not a large cut, but hopefully it'll have an impact on consumer sentiment as we get into an easing cycle,' said CEO Andrew Reeves.

'One of the things that's been dragging on the poultry category over the last 12-18 months has been discretionary spending, which particularly affects our large quick service restaurant customers. We are seeing some stabilizing in those channels, and hopefully that sentiment starts to improve so we'll get back to volume growth – a really positive thing for the business.'

Inghams reporting results

Buy, hold or sell?

ASX Tradewatch data suggest Wesfarmers shares are in a strong bullish trend, with the 5-day moving average (MA) above the 50-day MA, while both the 200 and 20-day MA are also trending higher.

Wesfarmers analyst recommendations chart

Most analysts suggest holding the stock, which has an average target price of $71.72, suggesting it could drop a further 7%. Barrenjoey raised its target price 11% to $69 in the wake of the result, while Citi increased its target to $61 from $59 but maintains a sell rating at current levels.

When it comes to Inghams, the average recommendation on the stock is also a hold, with a $3.57 target price, suggesting the stock can add a further 3% from here.

Inghams analyst recommendations chart

Morgans sees the stock as 'lacking momentum', however and has downgraded it to a hold from an add with a new target of $3.58.

The average price target on Guzman is $40.57, suggesting a further 13% upside. Barrenjoey has raised its PT on the stock to $54 following the results, while Morgans also sees further upside, upgrading Guzman to an add following recent share price weakness.

And analysts say further expected rate cuts could boost consumer staples stocks - but for now there's no major reason to re-rate the overall sector.

Guzman y Gomez analyst recommendations chart