In Brief: Consumer Discretionary Serves Up A Smorgasbord

This story features GUZMAN Y GOMEZ LIMITED, and other companies. For more info SHARE ANALYSIS: GYG

In the world of retailing, its often winner takes all, or at least a large piece of the consumer pie. So what did this reporting season reveal about some of Australia’s leading consumer discretionary stocks?

-No stopping the taco gravy train
-Accent, hip brands drive growth
-Are store transitions the key to Viva Energy’s secret?
-Kogan a tale of two narratives

By Danielle Ecuyer

Quote of the week comes from Jensen Huang, CEO of Nvidia on Q2 earnings call. 

“Generative AI will revolutionize every industry.”

Tacos and momentum

A retail revue wouldn’t be complete without a comment on the biggest swinging IPO this side of 2024 and maybe 2025, which is Guzman Y Gomez ((GYG)).

Living up to the share price momentum, Guzman’s performance came in above prospectus forecasts for FY24 earnings, including 8.1% growth in same store sales growth with a 30% restaurant margin, 30 basis points above the prospectus.

Same store sales growth has powered (well almost) into the first seven weeks of FY25 at 7.4%, well above the prospectus, Wilsons quips.

The broker is happy to stay upbeat on the taco chain, based on 91 net new store rollouts; “impressive” same store sales growth, with a topping of margin expansion.

All-in-all a chicken dinner winner of a fast-food chain recipe, leading to a target price increase to $41,14 from $31.98 and an Overweight rating.

Accent the Positive

Looking through the FY24 in-line earnings report and a below expected start to FY25, Evans and Partners instils a sense of hope for investors that Accent Group ((AX1)) is down but anything from out.

Wilsons also viewed the FY24 results with a bit of a yawn. Many of the metrics were in line with pre-released guidance. In turn the share price sell-off post results was attributed to the less than hoped for trading update at the start of FY25.

Like-for-like sales came in at 3.5% growth, below the 2H24 rate of 4%.

Petra Capital observes the trading update for the first seven weeks needs some context and may not be as downbeat as the market reaction implied.

Accent was cycling lower comps for May/June and July. When viewed across a two-year period, Petra reveals no slowdown in like-for-like sales growth, with footwear doing notably better than clothing.

While the Glue stores remain a drag into 1H25, E&P are upbeat on the prospective 50 new store openings in FY25, particularly Nude Lucy, Stylerunner, HOKA and UGG. 

Management highlighted “new store performance remains strong with sales, profit and return metrics in line with expectations”.

With an improved outlook for consumer spending in FY25, E&P find Accent’s forecast of circa 10% earnings before interest and tax growth over FY25/FY26 as underwriting a Positive rating with a valuation of $2.53.

Wilsons likes the improvement in FY24 gross margin to 55.8% with the write-down of Glue inventory a -$3m blemish or -20 basis point drag. This was registered on the back of adverse foreign exchange rates and, still, a weak consumer.

Share price weakness offers a good buying opportunity according to Wilsons (Overweight, $2.40 target price). Near term tailwinds for Accent include the Glue closures, cost-out program, vertical product growth and TAF acquisition strategy.

Petra is also in the upbeat camp (Buy, $2.35 target price) with higher like-for-like sales above 3-4% growth re-leveraging the financials for earnings upgrades.

Valuation around 14x is believed to be attractive on conservative earnings forecast assumptions and potential yield support over 6% for FY25 dividend forecasts.

FNArena daily monitored brokers have an average price target of $2.412, a prospective FY25 average dividend yield of 6.2%, with four Buys (Bell Potter, UBS, upgraded from Neutral, Morgans and Morgan Stanley).

Viva Energy on-the-run to profits

Digesting a -$1.2bn acquisition and transitioning the acquired convenience stores remains the lynch pin of the Viva Energy Group ((VEA)) story.

Goldman Sachs has lingering caution over the time required to transition over 500 stores, add an additional 85 stores and achieve $60m-plus in cost synergies, suggesting management’s initial targets are on the optimistic side.

The 1H24 results were broadly in line, although the interim dividend was on the skinny side, some -4% below Goldman Sachs’ forecast.

Management did flag the initial store transition is taking longer than anticipated due to town planning and landlord consent delays. The transition target has been scaled back to 30 over the next 12-months from around 70 by December 2024. 

Barrenjoey’s take on the results revealed a better than expected 6.7c interim dividend against consensus of 6c but overall the result was in line with the analyst’s estimates.

The slower conversion of the acquired Coles Express stores to On-The-Run (OTR) format is noted by Barrenjoey.  Viva expects more than $100m in EBITDA uplift, above the original $50m-plus by 2028.

Or as Barrenjoey highlights: over $200k per annum increase in shop margin on average is anticipated from all the 500-plus sites.

Could management be forgiven for the rollout hiccup?

Goldmans Sach is forecasting 18% compound average growth in convenience stores EBITDA over the next five years. Barrenjoey highlights management’s expectations of a higher level of performance from OTR sites relative to the Reddy/Coles network.

In the short-term, lower refining margins were a drag on target prices. Goldmans Sachs nevertheless sees value and upgrades the stock to Buy with a $3.60 revised target price.

Barrenjoey also tweaks forecasts, adjusts the target price by -5% to $3.70 and is Overweight rated

FNArena’s daily monitored brokers have an average target price of $3.78. Macquarie is the highest at $4.10 (Outperform rating) with UBS on Buy and Morgan Stanley on Equal-Weight (Neutral).

Kogan not feeling the love

Kogan ((KGN)) is facing an increasing conga line of competition. Two consumer discretionary giants, Wesfarmers ((WES)) with Catch and Woolworths Group ((WOW)) with MyDeal joined the market in 2019, alongside omni-channel operators Amazon and Temu. 

The crux of the brokers’ concerns lays in the Kogan model where Kogan First (a subscription model) subsidises benefits to the retail business. Barrenjoey highlights margins on retail have fallen to -7% from 3% pre-covid.

Jarden is also waiving the watch out for Amazon flag. The behemoth recently announced same-day delivery in Sydney. With Kogan’s active users declining over nine successive quarters, this broker highlights EBITDA has only grown via subscription membership.

Both brokers raise concerns about the April 8 Kogan First membership price rise to $129 from $99 and what impact it will have.

Management’s change of reporting, not to include the subscription and active user metrics, is also raising eyebrows.

Market share losses, lack of earnings transparency, governance issues and increased potential investment spending constitute numerous red flags.

In contrast, Canaccord Genuity proposes a much more upbeat view on the company. In this broker’s opinion Kogan remains “one of the largest and most profitable e-commerce retailers” in Australia.

Canaccord espouses Kogan’s key advantages over the likes of Amazon/Temu, including 85% of its white goods sourced from proprietary white labels; Kogan First subscription fees generating $44m in income and representing 26% of active customers and 61% to gross sales; its vertical integration across the likes of mobile/insurance/internet, and MightyApe which tips in $40m of first party sales.

All-in-all a retail recipe which delivers a “more immune” business model.

Canaccord clearly holds the gold flag for price targets at $8.20, almost double other brokers. A Buy rating is hardly surprising.

Jarden retains an Underweight (target price $4.70) rating, as does Barrenjoey ($5.30 target price).

Turning to FNArena’s daily monitored brokers, Kogan musters one Neutral rating (UBS, target $5.80) and one Sell from Citi ($4.20 target price).

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