Consumer staples – the battle for like-for-like sales growth supremacy continues between the two main supermarket chains, Woolworths and Coles, and for the first time in two years Coles could regain the lead in the September quarter. This is on the back of a successful Little Shop promotional campaign as well as Coles’ decision to extend its free plastic bag giveaway period to help customers transition to a plastic bag free world. The gains may only be short term in nature and ‘normal service’ is likely to resume at Coles in the December quarter but any win is still a win in the hugely competitive retail supermarket sector.
This bodes well for the upcoming demerger of Coles which Wesfarmers shareholders will vote on in November. Work is well under way on the transaction, with the new Coles board now finalised and with the supermarket is expected to be demerged with net debt of $2 billion. New CEO Steven Cain has also started and no doubt will have some ideas about how Coles can maintain its recent sales momentum.
Once Wesfarmers shareholders gives the final tick of approval, Australia’s second largest supermarket is due to be listed as an ASX top 30 company by the end of the year. The demerger follows a string of divestments over the past 12 months by WES (Curragh and Bengalla coal mines, Homebase and Kmart Tyre & Auto) and with the company flush with cash we think there is the potential for a capital return in the near future. Overall, we maintain a preference for Wesfarmers over Woolworths.
Consumer discretionary stocks – the consumer continues to be relatively resilient, as evidenced by the solid recent reporting season results from the sector. However, signs of a cooling housing market (particularly in NSW and Vic) make us more cautious on the outlook for consumer spending, given the ‘wealth effect’ that has bolstered consumer spending in recent years. Next year’s election is also front of mind as this usually has a dampening effect on retail trading for a short period.
Amazon continues to grow its product range as well as recently launching Amazon Prime and its local Fulfilment by Amazon for Marketplace traders, although we note Amazon is still heavily reliant on local third party retailers. While this is unlikely to materially impact Australian retailers in the short-term, we would point to the impact Amazon continues to have on its US retailers 10 years on.
The consumer continues to adapt to the new norm and, as always, there are select opportunities for companies which have a compelling offering or competitive edge over their peers. We maintain a preference for the specialty retailers with dominant market positions, less Amazon exposure, solid earnings growth prospects (risk to the upside) and valuation support.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410
