Several positive factors remain in play for retailing, even as some pandemic-induced consumer behaviours are scaled back. Others appear to be longer lasting.
Jarden observes the trends are consistent with a re-opening economy and should benefit views on several stocks including Flight Centre ((FLT)), Premier Investments ((PMV)), Accent Group ((AX1)), Domino’s Pizza ((DMP)) and Collins Foods ((CKF)). Restaurant bookings are also running at more than 110% compared with pre-pandemic levels, the broker notes.
In grocery, the broker’s industry discussions suggest inflation is returning and there is some gross margin benefit to retailers as a result. The risk of a price war is reduced as all major listed operators are increasing expenditure on supply chains, stores and service.
Jarden expects a drag will eventually occur on retail as consumption outside the home normalises slowly. Preliminary retail sales from the Australian Bureau of Statistics for May were up 7.4%. A decline of -0.9% in supermarket sales and -5.5% in household goods was countered by clothing, up 44.2%. Retail sales ex food and liquor/apparel/household goods were up 20.7%.
The factors supporting a positive retail outlook are in place, Citi assesses, including substantial household savings, the wealth affect from rising house prices and the closure of international borders, as well as a dearth in discounting household goods because of heightened demand.
The broker prefers household goods retailers such as Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) and also expects supermarkets will outperform. In Victoria, the May lockdown is likely to have provided a temporary boost that could persist into June because of the timing of restrictions.
Yet, Jarden suggests the outlook for household goods will become more challenged amid a risk that discounting returns in FY22, which would create sector risk when coupled with rising freight costs. Hence, the broker is cautious about JB Hi-Fi, Harvey Norman, Nick Scali ((NCK)) and Super Retail ((SUL)).
Jarden takes a moderate view on discretionary retail, asserting risk will increase as expenditure slows and inventory builds up. The broker expects spending on goods will soften in FY22-23 as the higher Australian dollar and housing market factors are cycled, and expenditure shifts to services.
Jarden forecasts a -1.6% decline in 2021 household cash flow with a falling savings rate. Industry consolidation is also expected to happen.
In discretionary expenditure the broker favours those companies that are building protection by investing in ecosystems in order to create long-term competitive advantages. Preferred exposures for the near term include Premier Investments, Adairs ((ADH)) and Accent.
Jarden believes the market needs to reward companies that accelerate investment if this increases their addressable markets over the medium term. Moreover, over the next 6-18 months competition should increase from the likes of Amazon and Catch ((WES)) amid a desire by consumers to move towards marketplaces.
Work From Home
Working from home appears to be a sticky trend resulting from the pandemic. Citi envisages this structural change will drive increased at-home consumption going forward. Demand should be further supported by investment in housing.
Working from home should be a structural tailwind for retailers and the trend appears relatively stable, despite the re-opening of the domestic economy. This, in turn, is expected to result in higher supermarket expenditure to the benefit of the grocers and drive a further wave of home office investment, to the benefit of the electronics and furniture categories.
It should also encourage more home renovation activity and support e-commerce. Citi estimates Australians are currently working from home around 1 day per week, up from 0.6 days per week pre-pandemic. Over the longer term the broker expects around half the workforce will work around 2 days per week from home on average given the structural shift that has occurred.
Shopping Centres
What about shopping centres? Macquarie recently visited three retail assets and a self-storage asset on Sydney’s northern beaches. The broker concluded there is still plenty of consumer strength in evidence.
Yet, in terms of large retail assets, Macquarie is wary that these are ceding market share and the strong sales backdrop is not translating into significant improvements in leasing spreads. On the positive side the covid-related rental deals seem close to finishing up, and vacancies are moderating albeit still well above historical levels.
Macquarie prefers to play a recovery in retail property via Vicinity Centres ((VCX)) as a top pick followed by GPT Group ((GPT)) and then Stockland ((SGP)), but remains cautious about the outlook, given cash flow pressures from elevated downtime and negative leasing spreads.
The broker also has Outperform recommendations on Aventus Group ((AVN)), Shopping Centres Australasia((SCP)), Abacus Property ((ABP)) Homeco Daily Needs ((HDN)) and Charter Hall Retail ((CQR)).
