Discretionary Retail: Something had to give

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
12 June 2023, 7:00 AM
Sectors Covered:
Gaming and Retail

  • Recent profit warnings by discretionary retailers have sent shock waves through the sector and reinforced the view that the consumer has reached a tipping point after months of enduring elevated inflation and higher interest rates. We have lowered the earnings estimates of all of the companies in our discretionary retail universe to reflect the likelihood of ongoing consumer stress.
  • In this note, we have reduced our FY23 EPS estimates as follows: Accent Group (ASX:AX1) (10)%; Beacon Lighting (ASX:BLX) (3)%; JB Hi-Fi (ASX:JBH) 0%; Lovisa (ASX:LOV) (4)%; Super Retail Group (ASX:SUL) (2)%; and Reject Shop (ASX:TRS) (13)%. We lowered estimates for Adairs (ASX:ADH), Baby Bunting Group (ASX:BBN) and Universal Store (ASX:UNI) in earlier notes.
  • It’s not all bad news. It is likely that we will see a moderation of inflation in the months ahead, while the number of rate rises still to come can surely be counted on one hand. When it’s all done, consumer sentiment may start to improve and, if analyst estimates are reset appropriately, we might start thinking about the recovery to come.

A tipping point for discretionary retail?

Recent negative trading updates from Adairs (ASX:ADH), Baby Bunting (ASX:BBN), Dusk (ASX:DSK) and Universal Store (ASX:UNI) have given rise to concerns among investors that discretionary consumer spending has deteriorated sharply in recent weeks.

For companies like ADH and BBN that have important promotional events at this time of year, it has become rapidly apparent that previous guidance was unattainable, triggering the profit warnings that have sent shock waves through the discretionary retail sector.

There are reasons to believe such a pullback in spending activity is in train and that we have reached the long-awaited tipping point in the consumer economy. In the first instance, dampening consumer demand to lower inflation is the primary objective of the RBA’s 12 successive rate hikes and can hardly surprise anyone that this objective is starting to be achieved.

Building on this, many households find themselves toppling over the much heralded ‘mortgage cliff’. CoreLogic has suggested that the ‘pain will be felt most acutely from April 2023’ as this is the two-year anniversary of when the size of two-year fixed mortgages really started to pick up.

Broadening out, all consumers have endured 14 consecutive months of CPI above 5% with the cost of essentials – groceries, fuel, rent – increasing relentlessly. The savings buffer has largely been erased. Something had to give.

We have lowered our estimates across the board

In this note, we update the estimates for all of the discretionary retailers in our universe other than those who have already warned (ADH, BBN, UNI), for which numbers have already been lowered. We have reduced our FY23 EPS estimates as follows: AX1 (10)%; BLX (3)%; JBH 0%; LOV (4)%; SUL (2)%; and TRS (13)%.

We have reduced our FY24 EPS estimates as follows: AX1 0%; BLX (5)%; JBH (5)%; LOV (5)%; SUL (2)%; and TRS (9)%. The changes put our estimates markedly below consensus in every case.

There are opportunities, but be selective

The recent selloff in the sector has created some buying opportunities in retailers that have been oversold. We have retained ADD ratings on BLX, LOV, SUL and UNI.

We believe there to be good upside to the share prices of these stocks over the next 12 months. We have downgraded JBH and TRS from ADD to HOLD.

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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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