Retail: Would you like that wrapped? Review of the FY21 - Reporting Season

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
07 September 2021, 7:00 AM
Sectors Covered:
Gaming and Retail

  • All things considered, the FY21 reporting season was generally positive for Australian retail. On a median basis, the stocks in our coverage universe beat our EBIT estimates by 3.0%, triggering a 4.7% positive share price reaction.
  • LFL sales averaged 12.0%, up from 4.6% the year before. The frontrunners were UNI (+28.5%) and SUL (+22.8%) and in our universe only TRS reported negative LFLs. The new year has brought substantial challenges around the navigation of extended lockdowns in NSW and Victoria and supply chain inflation and disruption.
  • We upgraded ADH and BLX from Hold to Add. We downgraded BBN from Add to Hold.
  • Our three top picks coming out of reporting season are BLX, LOV and UNI.

Five things we learnt in reporting season

Lockdowns hurt, but demand may come back quickly. The current COVID restrictions in NSW and Victoria are having a significant impact on current trading. Many retailers expressed confidence, however, that sales will recover quickly. The lifting of lockdowns leads to a release of pent-up demand, while opportunities to direct household spending elsewhere (especially travel) are more limited than in pre-COVID days.

Few retailers will hold onto all their gross margin gains in the year ahead. With LFL sales reversing, cost inflation through the supply chain, increased promotional activity and a weaker AUD, we expect most retailers to report lower gross margins in FY22.

COVID may have accelerated the trend towards online retail. After a year of extraordinary growth in online sales, e-commerce activity appears to be settling at levels well above pre-lockdown levels.

Stock positions have normalised, the risk is now being overstocked. Inventory positions have normalised after the tight stock availability at the end of FY20. Forward ordering could now, however, create risk around overstocking that may become an issue for retailers with seasonal and fashion-led products.

Indeterminate end date for lockdowns means there is elevated near-term risk to estimates. There would be material risk to our earnings estimates if the restrictions were to be extended through the peak Christmas sales period.

Caution prevails as we think about future earnings

We lowered our FY22F EBIT estimates by an average of 3% as we took account of the current lockdowns and pressure on margins.

LFLs have started the year in negative territory and, while an improvement is likely once lockdowns are lifted, it seems likely most retailers will report negative LFLs for FY22.

Figure 1: LFLs were exceptional in FY21, and FY22 will look very different

Growth stocks have had a choppy ride since the onset of the pandemic

Source: Morgans estimates, Company data. * ADH refers to Adairs-branded store sales.

Find out more

We share the full list of stocks with material upcoming catalysts and share our analysts' comments in our full research note.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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