Retail Stocks

[KW]

Good news out of OZ:

In Australia, retail sales rose by +0.9% month-on-month in May to AU$34.2 bln, topping market forecasts and matching the April gain. This was also their fifth straight month of growth, as the Aussie economy recovered further from pandemic disruptions. The rise from a year ago exceeded +10%, handily beating inflation. Department stores had the largest month-on-month rise, up +5.1%, followed by cafes and restaurants. Given Australian consumer sentiment is low, this free-spending is a puzzle - not too dissimilar to the same track in the US. Makes you suspect "sentiment" is now hijacked as political, whereas the spending track tells the real economic story.

Kind of need to be careful with that data - aside from the fact that raw $ figures merely reflect the increased prices of everything and not that people just bought more stuff,  I recently read a really good article about how in an inflationary recession retail sales boom in the beginning, fooling people into thinking that things are ok, when they really are not.  The reason that sales boom is because of inflation - people see the prices of things going up, and going up very quickly, so they panic and pull forward purchasing because they know if they wait then that item will be much more expensive later and they won't be able to afford it then.  So they do everything they can to find the money to buy it now - cars, household appliances, renovation work, etc.  The irony of course, is that this big pull forward merely gives fuel to the inflationary fire making it even worse, so central banks put up interest rates again, and so the ultimate recession becomes even deeper and more entrenched. 

[Basil]

Hi everyone.
Thanks KW.
Yes its very easy to be fooled into thinking everything is okay with spending when looking at headline numbers when inflation is running at 7%.  You make an excellent point about people bringing spending forward. 

One thing to watch this earnings season is the same principle applies with earnings.  For example a modest 3% increase in earnings per share in 2022 is actually a 4% reduction on PCP if you account for inflation.

Where "E" goes in FY23 is yet another matter altogether ?, again to be considered in relation to very high, (for recent decades), and probably very persistent inflation.  For example if company XYZ is showing no growth in eps year on year on year but inflation is running in the mid to high single digits...oh my goodness, what metrics does one apply to a company like that in the current high inflation environment, (i.e. decreasing eps in real inflation adjusted terms) ?

[Fiordland Moose]

Good news out of OZ:

In Australia, retail sales rose by +0.9% month-on-month in May to AU$34.2 bln, topping market forecasts and matching the April gain. This was also their fifth straight month of growth, as the Aussie economy recovered further from pandemic disruptions. The rise from a year ago exceeded +10%, handily beating inflation. Department stores had the largest month-on-month rise, up +5.1%, followed by cafes and restaurants. Given Australian consumer sentiment is low, this free-spending is a puzzle - not too dissimilar to the same track in the US. Makes you suspect "sentiment" is now hijacked as political, whereas the spending track tells the real economic story.

Kind of need to be careful with that data - aside from the fact that raw $ figures merely reflect the increased prices of everything and not that people just bought more stuff,  I recently read a really good article about how in an inflationary recession retail sales boom in the beginning, fooling people into thinking that things are ok, when they really are not.  The reason that sales boom is because of inflation - people see the prices of things going up, and going up very quickly, so they panic and pull forward purchasing because they know if they wait then that item will be much more expensive later and they won't be able to afford it then.  So they do everything they can to find the money to buy it now - cars, household appliances, renovation work, etc.  The irony of course, is that this big pull forward merely gives fuel to the inflationary fire making it even worse, so central banks put up interest rates again, and so the ultimate recession becomes even deeper and more entrenched. 

nicely put KW

[lorraina]

Hi everyone.
Thanks KW.
Yes its very easy to be fooled into thinking everything is okay with spending when looking at headline numbers when inflation is running at 7%.  You make an excellent point about people bringing spending forward. 

One thing to watch this earnings season is the same principle applies with earnings.  For example a modest 3% increase in earnings per share in 2022 is actually a 4% reduction on PCP if you account for inflation.

Where "E" goes in FY23 is yet another matter altogether ?, again to be considered in relation to very high, (for recent decades), and probably very persistent inflation.  For example if company XYZ is showing no growth in eps year on year on year but inflation is running in the mid to high single digits...oh my goodness, what metrics does one apply to a company like that in the current high inflation environment, (i.e. decreasing eps in real inflation adjusted terms) ?

Basil are you a Beagle.?
I  am  a bit of a Percy,but most people know that already....lol.

[Fiordland Moose]

Hi everyone.
Thanks KW.
Yes its very easy to be fooled into thinking everything is okay with spending when looking at headline numbers when inflation is running at 7%.  You make an excellent point about people bringing spending forward. 

One thing to watch this earnings season is the same principle applies with earnings.  For example a modest 3% increase in earnings per share in 2022 is actually a 4% reduction on PCP if you account for inflation.

Where "E" goes in FY23 is yet another matter altogether ?, again to be considered in relation to very high, (for recent decades), and probably very persistent inflation.  For example if company XYZ is showing no growth in eps year on year on year but inflation is running in the mid to high single digits...oh my goodness, what metrics does one apply to a company like that in the current high inflation environment, (i.e. decreasing eps in real inflation adjusted terms) ?

Basil are you a Beagle.?
I  am  a bit of a Percy,but most people know that already....lol.

oh my goodness, its my contention you might be right

[Arbroath]

The other huge headwind is going to be the weakness of the NZD which will hurt gross margins and is effectively another inflationary headwind which can also hurt demand.

[Benji]

Hi everyone.
Thanks KW.
Yes its very easy to be fooled into thinking everything is okay with spending when looking at headline numbers when inflation is running at 7%.  You make an excellent point about people bringing spending forward. 

One thing to watch this earnings season is the same principle applies with earnings.  For example a modest 3% increase in earnings per share in 2022 is actually a 4% reduction on PCP if you account for inflation.

Where "E" goes in FY23 is yet another matter altogether ?, again to be considered in relation to very high, (for recent decades), and probably very persistent inflation.  For example if company XYZ is showing no growth in eps year on year on year but inflation is running in the mid to high single digits...oh my goodness, what metrics does one apply to a company like that in the current high inflation environment, (i.e. decreasing eps in real inflation adjusted terms) ?

Basil are you a Beagle.?
I  am  a bit of a Percy,but most people know that already....lol.

oh my goodness, its my contention you might be right

My friend says Basil the Rat and watch Fawlty Towers.

More inflation means you put more discount in your value calculations.

[LaserEyeKiwi]

Weekly Update:

You cannot view this attachment.

[Basil]

Nice strong performance by MHJ and TRA this week.

[KW]

https://amp.theaustralian.com.au/business/retail/more-bad-news-in-store-for-australian-retailers-analysts/news-story/55b83bbfb869422145dbfedda5fb8f88
Australia's legion of publicly listed retailers could be only at the beginning of a painful unwinding of sales and earnings growth that could take another three years to play out, repeating the slow recovery for the sector seen in the wake of the Global Financial Crisis almost two decades ago.
"While we believe Australia is well progressed in 'Stage 1' of the GFC playbook, we believe it is too early to pivot to a positive sector view, given downwards earnings revisions have further to go ... and 'bad' news likely to come over next three to six months. We expect further analyst downgrades over the next three to six months as the 'story' of weaker consumer conditions flows through to listed retailer earnings."

Applies to NZ retailers as well.

[LaserEyeKiwi]

Weekly Update:

You cannot view this attachment.

[winner (n)]

Without being miserable I hope the big retailers aren't as glum as the small ones

Pretty dire when "Figures from Retail NZ show more than a third of business owners are not confident they will survive the next 12 months."

https://www.rnz.co.nz/news/business/470612/the-cost-of-retail-it-s-going-to-be-pretty-difficult-over-the-next-few-months

[BlackPeter]

Without being miserable I hope the big retailers aren't as glum as the small ones

Pretty dire when "Figures from Retail NZ show more than a third of business owners are not confident they will survive the next 12 months."

https://www.rnz.co.nz/news/business/470612/the-cost-of-retail-it-s-going-to-be-pretty-difficult-over-the-next-few-months

Sounds like there will be plenty of acquisition opportunities for companies with healthy balance sheets ... and there still will be less competitors around come spring.

All good - as they say in Palestine ... when apricots are cheap it is the the time to plant new apricot trees 

[Shareguy]

FB cautious  on retail. Insert from today

Recessionary risks appear to be rising and with retailers ultimately reliant on the spending habits of consumers, periods of economic weakness can meaningfully affect the bottom line; but the market may be overly cautious — retailers share prices have on average declined -21% since late last year. We analyse historical data and leverage our understanding of each retail company under coverage in an attempt to quantify the relationship between GDP and earnings. We find KMD Brands (KMD; OUTPERFORM) and The Warehouse Group (WHS, OUTPERFORM) are the most exposed to the economic cycle. On the other hand Restaurant Brands (RBD; NEUTRAL) and My Food Bag (MFB; no rating), operating in staple segments are likely to be more resilient. We recognise that a degree of caution is warranted as consumers look likely to face increasing costs of living and tighten discretionary spending. However, our calculations suggest the market may already be pricing in a downside scenario, allowing for: (1) a -22% decline in WHS's one-year forward NPAT which equates to a scenario where GDP declines -2%, and (2) for KMD's one-year forward NPAT to decline a further -14% from pandemic-interrupted levels.

[winner (n)]

Electronic Card Spend ex Stats NZ an indication how things are going

For month of June v last year

Core Retail...........UP 0.8%
Fuel....................UP 14.7%
Vehicle exc fuel....DOWN 5.0%
Total Retail..........UP 1.9%


Annual sales to June this year v last year

Core Retail...............DOWN 1.1%
Fuel........................UP 4.4%
Vehicle ex fuel..........DOWN 4.6%
Total Retail..............DOWN 0.7%