Consumer discretionary slowdown heading down under: Morningstar
Sharp declines at US giants Walmart and Target could be canaries in the coalmine for local retailers.
Mentioned: Harvey Norman Holdings Ltd (HVN), JB Hi Fi Ltd (JBH), Kogan.com Ltd (KGN), Target Corp (TGT), Wesfarmers Ltd (WES), Walmart Inc (WMT), Woolworths Group Ltd (WOW)
Morningstar analysts believe a savage selloff at major US retailers could soon hit Australian shores as investors fret consumers are moving on from pandemic shopping habits.
Higher inflation is causing US shoppers to switch spending from TVs and toasters to essentials and services and the same could happen here, says Morningstar director of equity research Johannes Faul. Record sales growth at the retailers who boomed during covid are also likely to start normalising as consumer spending returns to historic averages, he adds.
“We’ve seen what happens when the consumer is faced with high inflation or the cost-of-living pressures. Sales shifted from general merchandise to food,” says Faul.
American retail giants Target (TGT) and Walmart (WMT) sold off sharply last week after earnings missed expectations. Target fell 25% on Wednesday, the biggest decline since 1987. Walmart dropped 11% a day earlier and ended the week down 19%. Australian retailers sank in response as investors panicked about contagion risk. Wesfarmers (WES), JB Hi-Fi (JBH) and Woolworths (WOW) all ended the week down between 4% and 6%.
Faul attributes some of the results to transitory factors, including higher labour and fuel costs. But in a sign a broader change afoot, both retailers were left wrongfooted by the shift in pandemic shopping behaviour.
Sales in popular categories like apparel, furniture and electronics fell while food and beverage volume rose as consumers opted for groceries over discretionary spending. The shift left Target and Walmart with elevated inventories for general merchandise.
“Target’s management had anticipated a slowdown in general merchandise sales, but was surprised by the magnitude of the shift in consumer spending to services and away from goods,” says Faul.
Local retail picks
Australian retailers selling consumer electronics, home improvement and furniture are most vulnerable to a similar shift in consumer spending, says Faul. All three categories experienced the strongest growth since the pandemic.
JB Hi-Fi, Harvey Norman (HVN) and Kogan (KGN) are most exposed to a slowdown in consumer electronics demand while Bunnings-owner Wesfarmers is most vulnerable to a drop off home improvement activity.
Morningstar is forecasting sales momentum to decline in all three categories as consumer demand returns to maintainable levels by fiscal 2023.
JB HI-FI is the most overvalued stock under coverage in the consumer discretionary sector. Shares closed on Wednesday at $45.8, a 43% premium to fair value. The stock is down 6% year to date.
Kogan and Myer (MYR) are the most attractive shares in the sector, says Faul. Both companies will benefit from the shift to online sales from brick-and-mortar shops. He expects Myer to successfully transition sales online and management is planning to cut store space by almost 10% in the near term.
Myer closed on Wednesday at $0.42 cents, a 39% discount to fair value. Kogan closed at $3.60, a 69% discount to fair value.