Our retail analyst Josephine Little, recently provided an update on the consumer discretionary sector, reviewing our expectations leading into reporting season.
We expect a reasonably uneventful reporting period for most consumer discretionary retail companies. As is often the case, the outlook commentary from management will be the key factor considered by the market. Any retailer prepared to provide guidance for 2017 (at least in line with consensus) will be rewarded, in our view.
It’s an interesting time for the retail sector; with valuations seemingly stretched at the same time as consumer spending being relatively benign. Retailers are now facing a number of challenges including having to cycle a lower petrol price-induced previous corresponding period, fragile consumer sentiment, little to no income growth and a slow-down in the ‘wealth effect’ which has buoyed household spending in recent years.
The prospect of lower for longer interest rates is positive, although less of a direct stimulus for spending vs lower fuel prices. However, it should serve to support a reasonable housing market for longer. The lower Australian dollar remains a risk for all retailers with price increases the only real option to offset the impact on higher cost of goods sold.
We see upside earnings risk in the following stocks: Domino’s Pizza (DMP); Bapcor (BAP); JB Hi-Fi Ltd (JBH); and Baby Bunting Group (BBN). On our earnings miss list this reporting season is: Ardent Leisure Group (AAD). Not surprisingly, all of the ‘beat’ candidates are trading on premium valuations, making consensus upgrades critical for further outperformance. However, we remain comfortable holding all of these names.
It has become increasingly difficult to secure any kind of reasonable earnings growth in the sector while not paying ridiculous valuations for these stocks. While Automotive Holdings (AHG) and Ardent Leisure Group (AAD) pose some risk of missing consensus earnings expectations in August, we believe some of the key pressure points for these two stocks could ease into 2017. For Automotive Holdings we envisage a relatively benign 2016 result underpinned by a strong automotive result, however a very soft cold logistics performance.
A recent performance review of the underperforming cold logistics business should yield reasonable cost out and efficiencies to hopefully put a floor in profitability in 2016. Ardent Leisure – despite our expectations of a subdued 2016 result, we believe the market is already anticipating this and note consensus expectations have come down in recent weeks. Most importantly, we believe Ardent Leisure Group is capable of delivering reasonable earnings growth in 2017 for the first time in years (almost entirely driven by the company’s Main Event new centre rollout in the US) while a Marina's division sale above book value presents a further catalyst for the stock.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410.
