"Writing on the wall": Big drop at Walmart signals pain to come for JB Hi-Fi, Harvey and Myer
Momentum for the consumer discretionary sector is going backwards and spells trouble for earnings.
Johannes Faul: Walmart put out a trading warning or a trading update overnight. And essentially, what they're saying is, they're seeing very high food price inflation, double-digit food price inflation is what they're talking. And the way the consumer in the US is reacting, they are cutting back on their spending when it comes to TVs and fridges, consumer electronics, apparel, all those things, and Walmart says they will have to discount, especially in the apparel category, so think fashion, they will have to discount quite significantly and that will weigh on their earnings. And the worry obviously is, in Australia, that this might be a warning sign for what's to come in Australia.
So, we've been very surprised on how strong the consumer is in Australia in terms of their spending. So, JB Hi-Fi surprised us significantly on the upside on their sales in the fourth quarter, in the June quarter. And then, today, Myer announced very strong sales results on top of already strong sales in the previous corresponding period. So, everything is pointing towards the Australian consumer has been still buying TVs and apparel in the June quarter and into July. But we see that shifting. We see the warning signs that we're seeing in the US, just like everyone else, and we think the writing is on the wall. And what's really happening is, if you think about the momentum where that's going to head is, we have record low unemployment. We've got very low interest rates that are now sharply going up. We have a lot of savings that are on the sidelines. So, we are almost in the perfect position, but the momentum we see is going backwards and that spells trouble for earnings in the consumer discretionary market, so thinking JB Hi-Fi, Harvey Norman, Myer, those stocks will see earnings weaken going into fiscal 2023 on our numbers.