Mixed Outlook For Australia’s Retailers

This story features MYER HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: MYR

-Myer’s online appeal improves
-Flight Centre, Bunnings traffic grows
-Woolworths long-term is challenged
-Metcash faces more competition
-JB Hi-Fi, Super Retail, Pacific Brands struggle
-Lower petrol benefits food, gaming, travel
 

By Eva Brocklehurst

Christmas trading turned out to be not as bad as was feared heading into the silly season. UBS observes the influx of shoppers came late and had softened by early January. The broker’s latest feedback suggests that sales progressively improved in December and were up around 8.0% and 16% year-on-year respectively in the final two weeks of 2014. By category, leisure and fashion stood out while electronics and household goods were mixed.

UBS has identified five trends from web traffic heading into Christmas. Momentum at Myer ((MYR)) accelerated, Dick Smith‘s ((DSH)) aggressive strategies won market share, offshore fashion names improved, growth at Flight Centre ((FLT)) accelerated as did web traffic at DIY names such as Wesfarmers‘ ((WES)) Bunnings. The broker observes Australian retailers are executing well and this should support sales growth over the next year. Online sales make up around 7.0% of all retail sales in Australia, although the rate of growth is slowing in UBS’ analysis. A weaker Australian dollar and better execution by local retailers are given as reasons why international sales are ebbing.

Morgan Stanley’s survey and analysis indicates Australian online retail spending will still be on the rise in 2019. The broker suggests 20% penetration is the critical point where adoption rates for prior technologies have accelerated. Morgan Stanley forecasts non-food online retail penetration at 12.9% in 2019, still some way of the aforesaid inflection point. While the search for cheaper products online is still the most important driver, this is diminishing. Only 53% of consumers stated that price was a top three factor in shopping online, down from 63% two years ago. Morgan Stanley attributes this to the efforts by Australian retailers to narrow price differentials.

The broker expects Myer to benefit most from increased online spending among the stocks under coverage. The online appeal of the brand appears to have improved significantly. Clothing and groceries are expected to be the categories to benefit most from the move to online shopping. Significantly, only 14% of those surveyed purchased fresh food online but 32% expected to do so in the next 12 months.

Store sales growth for the grocery category has improved but, as Morgan Stanley’s analysis reveals, much of the improvement is from growth in the tobacco category, which is margin dilutive. The federal government announced four tobacco excise increases in 2013 to be implemented over four years. Tobacco consumption may have been in decline for many years but remains one of the largest supermarket categories, accounting for 7-8% of sales, so the timing of significant excise increases affect overall industry growth. After excluding the tobacco category Morgan Stanley observes supermarket sales growth only improved by 90 basis points compared with the headline data which suggests a 200bps improvement in 2014 against 2013.

Looking ahead, JP Morgan identifies some key issues facing investors in the retail sector. Woolworths‘ ((WOW)) share price has declined 22% from its all-time high in April last year and the question is about when it becomes attractive for the investor. While the current dividend yield of 4.8% appears attractive, because of a lack of large investment alternatives in the market JP Morgan considers the long-term outlook is challenged, with margins of 8.0% in food & liquor arguably unsustainable.

The broker also find it hard to determine just when Metcash ((MTS)) earnings will stabilise. The challenge is that its transition year of FY15 ends when the competitive environment in South Australia and Western Australia becomes more difficult, as Aldi expands in these markets where Metcash has its largest share. The risk in the broker’s view is that FY15 may not be the base level and earnings could continue to fall. The broker suspects Myer may struggle to meet guidance as it faces more difficult comparables for the remainder of FY15.

JB Hi-Fi‘s ((JBH)) new CEO, Richard Murray, is also under scrutiny as to whether he can restore the premium price/earnings multiple the stock once enjoyed. JP Morgan suspects near-term announcements may continue to be negative. The broker is not optimistic about Super Retail ((SUL)) either, as its share price has fallen 43% from its peak in November 2013. Key issues in sports and leisure are unresolved and the ability of management to implement plans remains uncertain. Lastly, recovery continues to be fraught for Pacific Brands ((PBG)) which, while reducing complexity, continues to face rising sourcing costs.

The reduction in crude oil and the impact on petrol is a positive for consumers, in JP Morgan’s view. The broker’s analysis reveals the fall in the petrol price has more impact than a 25 basis point interest rate cut as more consumers buy fuel than have mortgages, the price is more visible than most other products and fuel is a higher proportion of spending for the less affluent consumer. The sectors likely to benefit from this are expected to be, gaming, restaurants and domestic travel while discretionary retailers are less likely to benefit.

Deutsche Bank does not believe lower petrol prices will “save” households. The big picture facing households has not changed and the broker believes this explains why the slide in petrol prices has had such a limited impact on sentiment. Wages growth is running only just ahead of inflation while tax bills are higher and employment growth is soft. None of this is likely to change, in the broker’s opinion. Moreover, as a net energy exporter the other effects on Australia of lower oil prices are lower government revenues, which only adds to fiscal pressure. Ultimately a share of this pressure is borne by households.
 

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