Clouds Gather For Retailing, Consumer Finance Outlook

This story features PREMIER INVESTMENTS LIMITED, and other companies. For more info SHARE ANALYSIS: PMV

-Subdued fashion retailer outlook
-A-REITs buffered by bond spread
-Financial stress set to worsen
 

By Eva Brocklehurst

The retail outlook seems ominous. The measure of Australian consumer confidence within the Westpac/Melbourne Institute survey which asks the question regarding family finances in the next 12 months fell 23% month on month in May, the largest such decline in over 30 years. UBS observes, historically, this measure has been the best leading indicator for retail sales. May retail sales in Australia appear to have deteriorated across the non-food sector and fashion leads the decline, driven by a warm autumn. While the analysts warn of the importance of not getting too anxious over one month's data, soft sales during winter inevitably lead to heightened promotional activity and pressure on margins. UBS also believes the negativity surrounding the federal budget will continue for some time and this increases the likelihood that weaker sentiment will continue into FY15.

What does this mean for stocks? UBS concludes that, despite the short-term noise, there is downside risk to confidence and this lands squarely on fashion retailers such as Premier Investments ((PMV)) and Myer ((MYR)) as well as discount stores such as Wesfarmers' ((WES)) Target and Super Retail's ((SUL)) Rebel. Where are the positives? Leisure sales appear to have stabilised in May and this provides some positives for Super Retail. Trends across furniture categories appear to be more resilient. UBS observes this is consistent with trade feedback that suggests housing-linked categories have been less affected by budget sentiment. The broker makes no changes to forecasts but does believe the weak trends deserve watching, particularly through the clearance periods of June and July.

The latest data also cause UBS to take a look at valuations for Australian real estate investment trusts (A-REITs). The sector's yield spread to the 10-year bond is supportive of valuations and this should provide a buffer against the softening in retail fundamentals. The distribution yield spread is running at 200 basis points compared with the 10-year average of 170 bps. The S&P/ASX 200 A-REIT index has outperformed the market by 3.5% since the 10-year bond has retraced to 3.7% from 4.4% in December 2013.

Nevertheless, soft retail sales could prolong a period of negative leasing spreads and impact operating income growth for the discretionary retail exposures in the sector. UBS includes Westfield Retail ((WRT)), Westfield Group ((WDC)), CFS Retail ((CFX)) and GPT ((GPT)) in this category. The broker prefers Federation Centres ((FDC)) and Charter Hall Retail ((CQR)) because of the resilient nature of retail centres dominated by food and retail services. UBS still expects retail fundamentals to start improving at the end of 2014 and maintains a neutral outlook for regional malls.

Dun & Bradstreet observes financial stress is set to worsen in the next three months as slow wages growth, high household debt and the cost of living impact on consumers. The D&B Consumer Financial Stress Index has risen to 18.7 points in April from 13 points in January. By July the index is expected to hit 24.8 points, the second highest level in its four-year history. D&B Australia & New Zealand CEO, Gareth Jones, said the upward trajectory is concerning, given the number of otherwise improving signals in the economy.

"Over the past months businesses have been reporting more positive expectations for sales and profits, and the jobs market has surprised on the upside – however, the financial position of consumers forms a significant piece of the recovery puzzle," he said. With the potential for the federal budget to weaken shaky consumer confidence, in addition to soft wages growth and the World Bank finding that Australia is the most expensive G20 nation, Jones would not be surprised if the financial position of consumers comes under more strain.

In terms of the states, the index shows Queensland has the highest financial strain index in Australia. This is forecast to rise to 37 points in July from 23.1 points in April, driven by the likelihood of a spike in small business failures as projected by D&B. NSW was the only state to record a month-to-month improvement in financial stress, as the economy benefitted from strong population growth, booming construction and a lion's share of the new jobs. Western Australian consumers experience much lower levels of financial difficulty, as the state's economy is relatively strong, but D&B notes the stress index is edging upwards and is expected to reach 9.2 points in July from relatively flat levels currently.

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