Can Christmas come early for retail stocks?
It certainly has for many of the share prices. The likes of consumer electronics retailer JB Hi-Fi, automotive and outdoors group Super Cheap Retail, discount retailer The Reject Shop, retail holding group Premier Investments, furniture and electronics specialist Harvey Norman, Beacon Lighting, telecommunications specialist Vita Group and footwear group RCG Corporation have been strong performers in the last 12 months.
However, this certainly could not be said to be a sector-wide trend, with consumer electronics retailer Dick Smith Holdings, the perennially struggling Myer, upmarket retailer OrotonGroup and value-based retailer Specialty Fashion – which is dealing with the disastrous Rivers acquisition – all leaving shareholders badly out of pocket.
But a marked recent lift in Australian consumer confidence has the sector looking forward to Christmas. The monthly Westpac-Melbourne Institute survey has optimism near a two-year high, improving by 3.9% in November, following a similar-sized increase in October. On this measure, consumer sentiment is now more than 5% higher over the year.
The weekly ANZ/Roy Morgan survey of consumer confidence has fallen from what had been 10-month highs, but confidence is still up over the year on this measure. The outlook for family finances over the next year – contained in the ANZ/Roy Morgan survey – is holding just below a 20-month high reached in mid-October, which was attributed to very strong employment figures for October: the economy added 58,600 jobs in October (40,000 of them full-time), enough to cut the unemployment rate from 6.2% to 5.9%, a five-month low.
That’s all good, solid grounds for optimism for a strong Christmas retail season.
But then came the sharp 9.2% fall in private capital investment in the September quarter as the mining and resources boom went cold.
The million-dollar question is whether this spooks Australian consumers, or whether they retain their confidence in housing taking over the driving role in the economy from the mining sector.
Investors would have gained confidence from Myer’s surprise 4% rise in comparable sales for the three months to October 24. This followed rival David Jones’ 10.4% jump, its best sales growth in 15 years. Same-store sales in Harvey Norman’s Australian stores surged 7.1% in the September quarter – the company’s strongest sales growth in seven years.
Let’s look at how the retailers are positioned.
JB Hi-Fi (JBH, $19.65)
Market capitalisation: $1.9 billion
Last 12 months: +32.8%
Analysts’ consensus price target: $20.33
Implied upside: 3.5%
iPhones, gaming (hardware and software), TV audio, computer and tablet sales are the categories expected to drive JB Hi-Fi to a reasonably strong Christmas sales period. The company is also considered well-placed to benefit from emerging product trends such as wearables and drones, and the continued roll-out of its HOME superstores. If Australians open their wallets as expected this Christmas, JBH will be a major beneficiary. However the stock has risen in anticipation of this, and is getting near to the consensus price target of the analysts that follow it.
[1]Source: Yahoo!7 Finance 30 November 2015
Harvey Norman (HVN, $4.06)
Market capitalisation: $4.5 billion
Last 12 months: +21.5%
Analysts’ consensus price target: $4.34
Implied upside: +6.9%
Gerry Harvey has certainly dismissed any concerns about consumer sentiment, saying the strongest sales growth in Harvey Norman’s stores for more than seven years is proof that shoppers are confident and willing to spend. Same-store sales in Harvey Norman’s Australian stores jumped 7.1% in the September quarter. Harvey Norman’s sales growth has been boosted by the housing boom, and here the broker expects an easing in the second half and into FY17. However, renovation/refurbishment activity could buttress HVN. Overall, analysts believe HVN has room to move higher, and it is a relatively high-yielding stock.
[2]Source: Yahoo!7 Finance 30 November 2015
Premier Investments (PMV, $13.98)
Market capitalisation: $2.2 billion
Last 12 months: +40.8%
Analysts’ consensus price target: $12.64
Implied upside: –9.6%
Premier Investments’ shareholders might not be impressed by the revelation of a series of undisclosed bonuses paid to chief executive Mark McInnes – 34% of the shares voted the bonuses down at last week’s annual general meeting, comfortably earning Premier a “first strike” – but they have few complaints with the stock’s strong performance over the past year. Stationery brand Smiggle is the star performer in the Premier stable and its overseas expansion is proceeding apace. The group’s fashion chains Dotti, Portman and Jay Jays are also responding to a lot of hard work put into their turnarounds – but Smiggle is where further upgrades to earnings will come from. Appears fully valued at present.
[3]Source: Yahoo!7 Finance 30 November 2015
RCG Corporation (RCG, $1.54)
Market capitalisation: $702 million
Last 12 months: +139.3 per cent
Analysts’ consensus price target: $1.67
Implied upside: +8.4%
Footwear specialist RCG Corporation – owner of The Athlete’s Foot and exclusive distributor in Australia and New Zealand of brands such as Merrell, Saucony, CAT (Caterpillar), Vans, Dr. Martens, Timberland and Sperry – is one of the stars of the sector. Revenue and profit growth was healthy in 2014-15 and broker Morgans says it has made a “cracking” start to FY16. The company told this month’s annual general meeting that like-for-like sales had grown by 5 per cent during the first 16 weeks of FY16, and that it expects an increase in underlying earnings per share in FY16 of 25%–30%. The only worry is that RCG has done so well, it is no longer cheap on P/E grounds – even though analysts appear to think it can keep rising.
[4]Source: Yahoo!7 Finance 30 November 2015
Super Retail Group (SUL, $10.36)
Market capitalisation: $2 billion
Last 12 months: +40.6%
Analysts’ consensus price target: $10.07
Implied upside: –2.8%
The owner of the Rebel Sport, Super Amart, BCF, Rays Outdoors and Super Cheap Auto brands usually has a strong Christmas. In October, SUL said all three of its operating divisions (Super Cheap Auto, Rebel and Ray’s) had posted positive same-store sales growth in the last two months.
This Christmas season is complicated by the company being in the midst of a re-positioning of Ray’s Outdoors as a more contemporary offering of outdoor adventures: SUL is also a retailer exposed to the effect of currency weakness on its buying. Brokers are happy with its sales and margins, but again, a strong performance over the year seemingly makes it tough for the share price to push much higher.
[5]Source: Yahoo!7 Finance 30 November 2015
Myer (MYR, $1.07)
Market capitalisation: $879 million
Last 12 months: –26.7%
Analysts’ consensus price target: $1.15
Implied upside: +7.2%
Myer’s surprise 4% rise in comparable sales for the three months to October 24 certainly caught the eye of the share market – it was the strongest quarterly sales growth the company has seen in six years – and the share price has gained 12 % in the last two weeks. The sales rise prompted UBS to upgraded Myer to a buy, but the market is not uniformly impressed, with other brokers concerned that the rise came from discounting to clear, which runs against management’s stated determination to compete on brands and in-store experience. Myer looks good on valuation, yield and analysts’ consensus price target, but there is one very big warning sign: MYR is one of the top five most-shorted stocks on the ASX at the moment. That tells you Myer cannot afford a single error from here.
[6]Source: Yahoo!7 Finance 30 November 2015
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