Retailers riding on the health of the consumer - Part 1

Black Friday, which occurred towards the end of November, was the unofficial launch into what is expected to be a bumper retail period. For example, between Black Friday and Cyber Monday it is estimated $6.2 billion was spent over the four days according to the Australian Retailers Association.

Analysts too are expecting Australians to spend like they’ve never spent before, with sales momentum expected to continue through to Christmas and the robust Boxing Day sales period.

Hang on.

Didn’t we just have our eighth consecutive interest rate rise which has taken the official cash rate to 3.1%? Well understanding the impact of rising interest rates on consumers is a little more nuanced than that.

Westpac Banking Corporation CEO Peter King said it best recently when he warned the RBA that there were signs that the psychology of consumers and businesses around inflation has shifted and that inflation expectations are becoming entrenched. Which means they are accepting paying more, despite the rising cost of living reducing disposable income.

We share the view that stocks in the retail sector will be resilient in the near term, particularly as Australians and New Zealanders remain employed. But that doesn’t mean this year’s sales period is not without its risks. Current issues include:

• High inflation and rising rates. In 1988, not only was the first-generation Nintendo Entertainment System top of Santa’s List, but it was also the last time inflation was at this level in the lead up to Christmas. The RBA and RBNZ is raising rates in response, however if they wish to make a dent on inflation using a blunt instrument like interest rates, they may have to take to it with an even bigger mallet.
• Consumer confidence. This stands to be the biggest risk to spending levels this Christmas. As property prices fall and the cost of living goes up, consumers become less confident with current levels not seen since peak COVID and prior to that the GFC. But with record low unemployment, record levels of disposable income, on trend levels of Household savings and improving wage levels, whilst they may not like it – consumers’ capacity to spend across discretionary items remains robust.
• Supply side issues. Supply chain issues throughout 2022 have been well documented and lead to companies across many sectors, including retail, to stockpile to ensure timely supply. Fortunately, retailers are ready to meet the demand of Christmas shoppers. The only lingering issue is finding staff, however as the mix of online and in-store shopping evolves, retailers are finding more efficient ways to meet their clients’ needs in and around this challenge.

Despite these issues, observers of the sector will note correctly that when it comes to navigating cyclical or structural challenges, retailers are the masters of adaption. Therefore, we remain confident of the Retail sectors’ ability to deliver the goods this Christmas trading period.

When looking at Stockopedia we see a selection of specialty and diverse retailers (18 to be exact) that score very highly on the StockRank system (above 90), underscoring the sector’s strong structural qualities as mentioned above. Their combined qualities make then a sector to look at as we approach this critical time of year for them.

Below I highlight the merits of five stocks, including the current drivers of price performance. Tomorrow I will review the remainder.

These first five are not in any particular order.

ASX: PMV Premier Investments. QVM Stock Rank 97

PMV is a high quality stock, whose price reflects that quality as it trades on a forecast rolling PE of 17x and EV/EBITDA of 7.1x. While in the broader market perspective the stock is not expensive, relative to its peers, investors continue to rate this business as one of the quality retailers available and therefore are happy to support its above sector premium.

Further, since the company’s AGM, analysts have upgraded earnings expectations on the stock, a consistent trend over the last three months.

The rebound in price since July, coupled with the earnings revisions, sees the stock rank highly on Momentum. Coupled with the company’s high quality and it compensates for the more average Value score.

In its recent AGM the company highlighted that store growth coupled with its global expansion, saw global sales up 42.8% on the 1H22 to date, and they are well positioned for the upcoming critical trading period. Investors getting in now will also receive a special gift. The stock is yet to go ex-dividend, with a 54c final and 25c special dividend appearing under the Christmas Tree, should they buy and hold before the 10^th January.

Experienced rag trader Solomon Lew continues to hold a controlling stake in this business and is often criticized for running PMV as a personal venture, driven by his own goals.

ASX:HVN Harvey Norman Holdings. QVM Score 97

Likewise, HVN is a company run in a manner closely aligned to the vision and outcomes of its key investor, founder Gerry Harvey. This perhaps is no better reflected than by the company’s unusual dairy farming interest that it acquired in 2015 and sold at a loss in 2018.

As a retailer though, it continues to deliver very solid numbers. Numbers show that the Australian business continues to do well, and the company has big plans with its Malaysian launch that it spent most of its time talking about at the AGM where it wants to grow from 28 stores currently to 80 stores by the end of 2028.

Source: HVN AGM presentation, 24/11/2022

It pointed to currency moves as being the biggest contributing factor to the group’s overall more muted update year to date of just 6.9% sales growth. But investors will hope it’s Malaysian strategy can drive underlying top line growth.

Subsequent to the update in late November analysts have been lifting their expectation on earnings with many hoping that top line growth will be sufficient to cover any slowdown on account of a declining property market or stressed consumer.

ASX:JBH JB Hi-Fi. QVM Score 98

Please refer to Chris’ article for a breakdown of the current drivers impacting JBH. Read it here

ASX: MHJ Michael Hill International. QVM StockRank score 99

NZ born, but now days Australian listed, Jeweller MHJ was hit particularly hard during COVID resulting in store closures and a total rethinking of its traditional bricks and mortar business.

Looking forward, growth potential for the business comes from continued investment in the digital business, coupled with its expansion into Canada and the more frequent interactions from their loyalty program customers.

Sales to date in FY23 are up 27.5% against FY22 which provided comfort to investors left scratching their head as to how such a high-quality business, which is spitting cash trading on a forecast PE of 8.5x and EV/EBITDA of just 4 times AND pays a dividend yield of 6.94%, hasn’t been caught up in the revenge retail investing phenomenon, still trading well below its 52 week high.

Despite this, the four analysts that cover the stock remain rather stoic with revised earnings to the upside through 2022. There has even been a slight upgrade to earnings expectations over the past three months.

While pin-pointing reasons for possible price weakness outside of major announcements is a game of astrology, perhaps short-term holders are concerned about the successive rate rises including the recent 0.75% monster from the RBNZ.

As MHJ are squarely in the luxury item realm the perception is they will be the first to be cut when reality sets in the mind of the consumer. With modest EPS growth expectations, investors are acutely aware, it won’t take much to tip them into the red.

ASX: MYR Myer Holdings. QVM score 98 

Synonymous with Christmas retailing, the department store MYR has had its fair share of challenges over the years. Many investors old enough to remember may point to the sale of its property portfolio as the start of its demise. 

The distraction of the Solomon Lew powerplay was also a detractor, particularly in the dark performance days of the late 10’s. 

Others say it was doomed when it was listed at the very beginning. Or at the very least when then CEO Bernie Brookes referred to dealing with shareholders as “Herding Cats”. Not a great look either when he says he regretted listing the business. 

However, 2022 saw it return to much improved profitability, with reinstatement of its dividend policy. FY22 was the first year an interim and annual dividend was declared since FY17. 

Supported by its strong Myer One retail loyalty program, the new financial year has started strongly with sales up 52.8% on the prior year. 

It has invested a lot into its omni-channel sales process, particularly online which many felt it was late to the party on. This investment is starting to reap rewards as profitability is on an upward trajectory, sales are back above pre COVID levels and the soon to be operational National Distribution Centre in Ravenhall (west of Melbourne) is likely to improve margins further.

See you tomorrow for the remaining companies.

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