Retail Sales Avoid The Gloom, For Now

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The retail sector has avoided further gloomy news for now, with sales data revealing a welcome rebound in May.

-Rate of growth in supermarket sales not expected to be maintained
-Weak household income suggests discretionary segment remains under pressure
-How much growth is left in the household goods segment?
 

By Eva Brocklehurst

The retail sector has avoided further gloomy news for now, with sales data revealing a welcome rebound in May. Housing-linked and apparel categories improved, while larger supermarket chains performed better than the smaller outlets.

Retail sales grew 4.1 % year-on-year and above the 12-month average rate of 2.5%. Deutsche Bank believes the year-on-year numbers provide a better reading for listed retailers. Of note, non-food growth was strong, having been weak in recent months. In food & liquor, sales grew 3.8% versus the 12-month average of 2.3%.

Household goods and groceries stood out and, while apparel/footwear was strong, the fashion category was affected by weaker department store sales. Sales growth in restaurants (5.3%) and takeaway food (5.2%) was in line with expectations.

At face value the May retail sales data appears supportive of discretionary retailers but Credit Suisse urges caution, in view of the pulling forward of spending because of sales activity. The broker suggests there is downside risk to June and figures in this month will be more informative.

Supermarkets And Food

Supermarket growth of 4.1% was significantly above the 12-month average of 2.2% and brokers note growth appears to be driven by seasonal inflation. Morgan Stanley suggests cost-led food inflation and the lapping of a weak prior corresponding period were the main drivers. Continued investment in price at the larger chains has helped, as chain grocery stores posted growth of 5.5% in the month compared with smaller grocery stores that reported a decline of -3.6%.

Deutsche Bank's analysis indicates independent supermarket sales decreased -6.6% in the month versus -3.6% over the last 12 months. Credit Suisse believes the performance of small food retailers is problematic for Metcash ((MTS)) but Deutsche Bank disagrees, noting the company did not show a deterioration in its recent result. This suggests there is a potential disconnect between wholesale and retail, whereby Metcash could be doing better in non-traditional categories.

The recovery in supermarket sales was a surprise to Macquarie and the rate of growth is not expected to be maintained over the next 12 months, based on the current competitive environment and the push back from retailers on supplier price increases.

Industry feedback signals to UBS that the turnaround in Woolworths ((WOW)) was the main driver of improved growth in supermarkets. Growth in the year-to-date of 3.1% suggests there is modest upside risk to the broker's expectations for food & liquor growth of 3.0% in FY17. Feedback also reveals Western Australia has been very weak.

Morgan Stanley notes the "eating out" trend has stalled somewhat in recent months as cafe, restaurant and takeaway sector growth is now broadly in line with supermarkets. The soft read, as online takeaway food slowed to growth of 11% in May versus a six-month trend of 30%, potentially implies a slowdown in Australasian sales growth for Domino's Pizza ((DMP)).

Discretionary

With the exception of department stores and recreation goods, sales in the discretionary categories accelerated in May. On a seasonally adjusted basis department stores slipped -0.6% and recreation goods -3.0%. Clothing, furniture, electrical and hardware all rose.

Credit Suisse suggests growth rates for the hardware segment are continuing to be affected by the removal of Masters from the equation. Among the retail-exposed stocks, Premier Investments ((PMV)) remains the broker's preferred retail investment because of the likelihood of further international expansion of Smiggle.

In the short term, Credit Suisse suggests stronger sales growth may create a squeeze on Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)), while weak recreation and department store sales growth does not appear supportive of Super Retail ((SUL)) and Myer ((MYR)). Credit Suisse believes the latter four stocks are exposed to considerable downside risk from structural change in their respective areas.

UBS suggests the retail data may bode well for JB Hi-Fi and Harvey Norman in the lead up to the FY17 results, but no longer believes housing will be a tailwind in FY18 and questions just how much growth is left in the household goods segment. This, coupled with lacklustre consumer cash flow, poses a risk to discretionary spending in FY18 the broker warns.

UBS favours companies with earnings drivers that are outside of the macro environment, such as JB Hi-Fi with its incorporation of The Good Guys and efficiency programs at Harvey Norman. The decline in department stores bodes poorly for Myer and is consistent with the broker's negative view.

Given weak underlying employment and wage inflation, Macquarie prefers housing-related stocks such as JB Hi-Fi, Nick Scali ((NCK)) and Harvey Norman over discretionary retailers such as Myer. The broker suspects, while clothing and department stores fared better in May with the onset of colder weather, the slower start to the season has assured a tough clearance period ahead for most of this segment.
 

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