It’s one of the big questions for the Australian share market at present — what will happen with Australians’ spending? Will Aussies keep spending, in the face of higher living costs and rising interest rates?
After volatile swings around the year-end holidays, Australian retail sales stabilised in February. Figures from the Australian Bureau of Statistics (ABS) showed that retail sales rose just 0.2% in February, compared to a revised 1.8% rise in January. Total February sales of $35.14 billion were 6.4% higher than in January 2022.
As would be expected, we continued to spend more on food in February, but there were smaller rises in discretionary spending, such as at department stores, clothing, footwear and personal accessory.
However, Australian employment recovered strongly in February, after two months on the slide, and the jobless rate eased back to near 50-year lows, at 3.5%.
The consumer discretionary stocks have broadly under-performed over the past 12 months, but there is a fascinating tug-of-war going on in the way that consumers think. There is the factor of “revenge spending,” coming out of the COVID lockdowns experience. It is hard to quantify in hard data, but “retail therapy” seems to be real — even when household budgets are pressed, people will still shell-out on purchases that bring them some feel-good dopamine.
Here are three consumer discretionary stocks that have very good market niches, that they understand very well, and which position them well to navigate broader pressure on spending — and thus show healthy potential upside.
- Beacon Lighting (BLX, $1.76)
Market capitalisation: $395 million
12-month total return: –30.8%
Three-year total return: 47% a year
Estimated FY24 (June) yield: 4.2%, fully franked (grossed-up, 6%)
Analysts’ consensus target price: $2.21 (Stock Doctor/Thomson Reuters, five analysts), $2.315 (FN Arena, two analysts)
Beacon Lighting is Australia’s leading retailer of lighting, ceiling fans and light globes. Springing from the first Beacon Lighting store, opened in Melbourne in 1967, the company is now the largest specialty lighting retailer in Australia, with a network (at present) of 120 stores across Australia, 35 Beacon Lighting design studios, four commercial sales offices and an online offering, including its “Beacon Trade Club,” an exclusive program for the company’s loyal trade customers. The company says that research it did in December 2020 identified the potential for 184 Beacon Lighting stores in Australia.
Beacon International has sales offices in Hong Kong, Germany and the USA, with a support office in China. International sales are small but growing.
In FY22 (the year to 30 June 2022), Beacon achieved two significant milestones for the first time, with its sales exceeding $300 million and net profit exceeding $40 million. Total sales lifted 5.4%, to $304.3 million, while net profit rose 8.1%, to $40.7 million. Then, in the half-year to December 2022, Beacon lifted sales by 8.8%, to a record $164.7 million, while reporting a 6.7% fall in net profit, to $21.1 million.
Beacon Lighting is a vertically integrated business which designs, develops, sources, imports, distributes, merchandises, markets and sells its own product range to reach the needs of its retail, trade and online customers. More than 95% of the lighting and fan products it sells are supplied through the Beacon Lighting supply chain, while more than 85% are exclusively branded. Online sales are running at 10% of retail sales.
The big story in Beacon Lighting that investors have to grasp is the pivot that is underway into the trade market. The company estimates its potential trade market, specific to residential products, at $2.1 billion a year, part of a broader $6 billion wholesale electrical products Supporting its trade customers and growing trade sales is Beacon Lighting’s number one objective; sales to the trade sector make up more than a quarter of the total and are growing at more than 20% a year. Beacon expects to grow trade sales in FY23 by more than 25% and to lift Trade to half of group revenue within three to five years.
In the December 2022 half-year, total trade sales lifted by nearly 22%, Beacon commercial sales rose by 12%, and trade sales through Beacon Design Studios more than doubled.
The burgeoning offshore retail operations saw sales in Europe and Hong Kong jump by nearly 55% and 11 per cent, respectively. Beacon International USA sales to the US showrooms surged more than 65%, and accounts with new customers increased by around 44%.
But it is the Australian trade market that will become the primary driver of growth. Beacon’s strategy involves bringing electricians, builders, interior designers, architects and other professionals together, around its range of products and capabilities. As broker Morgans describes the way the company is viewed: “It appears many investors see the fortunes of the business as being tied inextricably to the housing cycle, which of course is expected to come under increasing pressure as mortgage rates continue to rise. But we believe the strategy to expand into the $2 billion trade market will allow it to offset the effect of weaker consumer demand.”
That sums up the situation pretty well – and from that perspective, the market looks like it is undervaluing BLX.
- Shaver Shop (SSG, $1.10)
Market capitalisation: $144 million
12-month total return: 1%
Three-year total return: 51.8% a year
Estimated FY24 (June) yield: 9.8%, fully franked (grossed-up, 14%)
Analysts’ consensus target price: $1.44 (Stock Doctor/Thomson Reuters, three analysts), $1.35 (FN Arena, two analysts)
Shaver Shop is a speciality retailer of male and female personal grooming products, and aspires to be the market leader in “all things related to hair removal.” Its main product categories include electric shavers, clippers, trimmers, hair styling, female hair removal and men’s and women’s wet shave items. It has 120 owned and franchised stores across Australia and New Zealand and an ecommerce platform. As the leading pure-play retailer in its category, where possible Shaver Shop seeks to work closely with global manufacturers to source the latest products, many of these on an exclusive basis.
The company says the Australian and New Zealand hair removal and personal grooming market is large and growing, currently about $10 billion — of which Shaver Shop says its share is about 3%. The market even grew during the pandemic — Shave Shop believes COVID-19 accelerated people’s focus on their personal care and grooming regimes, particularly how to maintain their appearance from the comfort of their home. This broadened Shaver Shop’s customer base considerably, and introduced the brand to a new segment of the market that did not really know of Shaver Shop’s offering before the pandemic. The company believes it has a substantial growth opportunity ahead, aiming to have more than 140 stores in Australia and New Zealand.
It is really interesting that Shaver Shop says it is seeing brand-new consumable categories springing to life — for example, beard oils and beard balms — that did not exist to any great extent just a few years ago. Shaver Shop estimates the men’s grooming market is now worth more than $1 billion in Australia and New Zealand, and id potentially growing faster than the women’s beauty and personal care market: men are just as heavily influenced by fashion and social media as women.
For the half-year ended December 2022, total sales rose by 3.8%, to a record $131.9 million: compared to pre-pandemic levels, sales were up 22.7% on the first half of FY20. In-store sales represented 76% of the total sales for the half, up 33.5%, to $100.8 million, as “customers continue to switch back to traditional shopping habits and channels.” Hair-cutting products are the biggest seller, at 34% of first-half FY23 sales, with men’s shavers the second-biggest, at 20% of sales.
Net profit rose 4.5%, to of $13.7 million, while the fully-franked interim dividend was lifted to 4.7 cents a share from 4.5 cents a year earlier.
Shaver Shop has lifted its sales for ten straight years, and it is reasonable expectation that it will continue to do that, selling into a large and growing market driven by changing consumer preferences and new product innovation. The company is in a very robust financial position, with $34.1 million in net cash and no debt at 31 December 2022. In a reasonably common refrain from the discretionary retailers, Shaver Shop said it was “not appropriate” to provide FY23 sales or profit guidance at this time, in view of the continuing uncertain macroeconomic environment and the potential impact on demand from cost of living — but this is a retailer with a growing niche, and one that it understands and serves very well. That should buttress Shaver Shop in over the uncertain times ahead.
The analysts’ dividend expectations on Shaver Shop look alarmingly large, but even if the company can match last year’s 10-cent payout (remember, 4.7 cents has already gone out) the nominal fully franked yield would come to 9. Let’s say the full-year dividend were to fall to 8 cents; the nominal yield would still be at 7.3%, before grossing-up.
That said, the current share price level on its own should eventually prove to have been very attractive.
- Universal Store Holdings (UNI, $4.77)
Market capitalisation: $366 million
12-month total return: –11.9%
Three-year total return: n/a (listed November 2020)
Estimated FY24 (June) yield: 6.5%, fully franked (grossed-up, 9.3%)
Analysts’ consensus target price: $6.73 (Stock Doctor/Thomson Reuters, 15 analysts), $6.125 (FN Arena, four analysts)
Upside 41.1%
Universal Store is another specialty retailer, in its case focusing on “trend-led and casual” women’s and men’s fashion, shoes, accessories, lifestyle and gifting. It offers a range sourced from local and international brands, and often works with brands to develop exclusive styles and collections to offer its customers, which it describes as the “16–35-year-old fashion focused” person. Some of the brands with whom it works in this way include Champion, Tommy Jeans, Kiss Chacey, Barney Cools, Abrand Jeans, Nobody Denim, Wrangler, and Lee.
The company’s principal businesses are Universal Store and THRILLS (a Byron Bay-based business it bought for $50 million in 2022, and which was at the time UNI’s highest-selling third-party brand) and it is currently trialling the Perfect Stranger brand as a standalone retail concept. Perfect Stranger originated as a private brand within Universal Store, but the company believes has the potential to provide a differentiated offer targeting the young female customer who has different tastes to a typical Universal Store customer.
UNI created Perfect Stranger in 2014 as a versatile, trend-setting label to fill gaps in its range that it did not feel were being met by its third-party suppliers. The company describes the brand as “a vehicle for rapid on-trend product design and replenishment, providing added capacity to utilise detailed knowledge of customer demands to offer ‘on-point’ products and range differentiation.” It certainly appears to have been a success: Perfect Stranger is now the largest brand in Universal Store, representing about 16% of sales (excluding standalone Perfect Stranger stores). In the December 2022 interim report, UNI noted that Perfect Stranger “remains the strongest women’s brand, outperforming all other brands.”
UNI is trying to repeat the success of Perfect Stranger with the launch in FY22 of its latest venture Neovision, which it says “continues to grow strongly, demonstrating our capability to build thriving youth fashion brands.” These private-brand purchases have grown to 43% of total sales, and the beauty of that is that they are higher-margin. The company’s gross margin has risen from 57% at December 2020 to 58.9% at December 2022.
Including Thrills, which currently has ten outlets, Universal Store operates 93 physical stores across Australia and three online stores. The company opened six new stores during the first half of FY23 – four Perfect Stranger (bringing the total to seven) and two Universal Store. The target is to add seven to ten new Universal Store sites a year. Management expects a further four to six US stores in the current half, plus three to four new Perfect Stranger stores and one new Thrills store: the target is to have up to 103 stores by the end of FY23, excluding three webstores.
In the most recent half-year, sales grew by 34.5%, to $146 million, while underlying net profit surged 44.4%, to $19.5 million. This enabled a 14-cent interim fully franked dividend, almost triple the 5-cent interim dividend of FY21.
UNI’s numbers all look strong, but the key to the stock’s trajectory will be the company’s ongoing ability to entice its core 16–25‐year-old customer cohort to spend. While Interest rate rises may not directly be a cause of financial stress among this group, housing shortages, increased rental costs and rising petrol and food prices are all relevant factors. Against that, UNI puts in a great deal of effort to leverage its data and understand its customers — it is classic old-school retailing, trying to anticipate what its customers will buy and give that to them. I think that investors who back Universal Store to do this will be nicely rewarded.
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