Recently the share market has been concerned with sectors that are indirectly exposed to weaker housing markets. A sector that the market has been focused on has been retail businesses. The thought process has been that weaker housing prices can lead to a negative impact on consumer confidence. The consumer can feel less comfortable and confident as their wealth is lower now than 12 months ago. Another common concern is Australian wages, which have hardly moved in the past five years.
Retail results were broadly no worse than feared against a backdrop of peak pessimism. Auto/motorcycle/RV sales were the worst hit due to high basket size and the discretionary nature of the product. Like-for-like sales growth was slightly better than expected with the pull forward of demand into November offsetting a tougher December period.
Foot traffic/in-store sales was definitely down, with most growth coming online. While this dynamic isn't new, with online sales penetration rates now at meaningful levels (average of 8 per cent of companies under coverage) it is certainly more noticeable and, in some cases, having a margin impact.
More importantly, top-line growth was no worse than feared against severe market pessimism. The market's reliance on foot traffic data over key trading periods needs to be kept in the context of how quickly online sales are growing. This also raises question marks around domestic store rollout programs going forward. We saw less emphasis broadly on future store rollout targets this reporting season.
Gross margins held up well (most expanded on the prior corresponding period), but lower hedge rates will see GM pressure emerge in second half of 2019 and more meaningfully in financial year 2020. Ability to increase prices to offset this in a tougher demand environment is questionable, making supplier conversations pertinent. Product innovation is also key.
Operating costs were higher than expected across the board, with cost to serve online proving a challenge and some general operating expenditure catch-up for most (bench-strength, systems, supply chains). Some will be able to leverage this investment going forward while others are planning on further cost-out programs.
As results have been no worse than feared with retail reporting season and against peak pessimism, the retail sector has had a re-rate in the valuation multiple applied by the market. The average price earnings multiple for retail has re-rated back to its long-term average trading at 14.4x earnings. Given the re-rating of the sector, you will have to be selective about the companies and the price you are willing to pay for retail exposure.
- Boh Burima Financial Adviser Authorised Representative: 000341081. Morgans Financial Limited ABN 49 010 669 726 | AFSL 235410
