Consumer Discretionary: Bargain Basement

About the author:

Author name:

By Alexander Mees

Job title:

Co-Head of Research and Senior Analyst

Date posted:

31 March 2023, 7:30 AM

Sectors Covered:

Gaming and Retail

• It’s been a tough 12 months for consumer discretionary stocks, but while many have seen a partial recovery in their share prices since October, some have continued to weaken. In this report, we identify 11 consumer discretionary stocks that are currently trading within 10% of their 12-month lows. History suggests many of these stocks could rebound. Of the stocks trading within 10% of their 12-month lows this time last year, 67% of them outperformed the benchmark in the following 12 months.
• We have sought to identify what the underperforming stocks have in common and, more importantly, which ones stand out as possible anomalies. Most (but not all) of the stocks currently trading near their 12-month low have reported a deterioration of sales in their most recent trading update. Others are undergoing strategic shifts that don’t yet appear to have broad investor support. A few of them have recently parted ways with their CEO, adding more uncertainty to what is already an uncertain outlook. And then some don’t have any of these commonalities. Stocks like Beacon Lighting Group (ASX:BLX) continue to trade well (despite concerns about the cycle) and others, like Adore Beauty Group (ASX:ABY) and Baby Bunting Group (ASX:BBN) have guided to a meaningful recovery in the months ahead.

Sifting through the discount basket

Concerns about the direction of consumer demand in the face of the cost of living pressures caused by an upsurge in inflation and rising interest rates have led to widespread underperformance of discretionary stocks over the past 12 months.

The median share price of our watchlist of 46 discretionary companies is down 32.6% over the past year. But while many have seen a partial recovery in their share prices since October, others have continued to slide and are within 10% of their 12-month lows.

An analysis of the stocks trading within 10% of their 12-month lows this time last year shows that 8 of 12 (67%) subsequently outperformed the broader universe of consumer discretionary stocks over the following 12 months. The average outperformance was +12% and 5 stocks (AX1, SUL, CTT, WES and RFG) outperformed by more than 30%.

What the underperformers have in common

The 11 stocks on our watchlist that are currently trading at prices within 10% of their 12-month lows are (in order) Adore Beauty Group (ASX:ABY), Globe International Limited (ASX:GLB), Shriro Holdings (ASX:SHM), Beacon Lighting Group (ASX:BLX), Mad Paws Holdings (ASX:MPA), Redbubble Ltd (ASX:RBL), Harvey Norman Holdings Limted (ASX:HVN), ToysRUs Anz Ltd (ASX:TOY), Baby Bunting Group (ASX:BBN), Dusk Group Ltd (ASX:DSK) and Shaver Shop Group (ASX:SSG).

A surprisingly common theme among many is a change in leadership. Four of these companies have announced the departure of the their CEO in recent months (ABY, BBN, DSK, RBL) and the uncertainty has impacted share prices.

Less surprising is that many of these stocks have reported a deterioration in sales in their most recent trading updates. BBN, DSK, HVN, RBL and SSG all reported negative sales growth in the first few weeks of the second half.

In some cases, underperforming stocks are undergoing a strategic shift about which the market appears to need convincing. These include SHM’s decision to exit kitchen appliances and TOY’s investment in the UK.

The stocks that don’t fit the mould

Beacon Lighting (BLX) stands out to us as an anomaly in this list. The business reported record sales in 1H23 and indicated sales were ‘holding up well’ so far in 2H23. Investors are almost certainly concerned about the risk of a cyclical downturn in the months ahead, but we believe the strategy to expand into the $2 billion trade market will allow it to offset the effect of weaker consumer demand.

We note that Adore Beauty (ABY), which has seen its growth stall post-COVID (along with most pure play e-commerce companies), has guided to a recovery in both sales and margins in FY24. Similarly, Baby Bunting (BBN) expects, and has guided to, an improving trend over the balance of 2H23, but has seen its share price continue to trend down.

Finally, shares in Shriro (SHM) have been hit after deciding to exit a loss-making division that will actually improve its underlying profitability.

Find out more

If you would like more information, please contact your adviser or nearest Morgans office. 

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.