Retail stocks on the wrong side of income

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From the SMH blog:

Ahead of July retail sales data out later today, Citi has put out a note taking a look at some of the stocks in the sector.

Retail stocks are pricing in further acceleration in consumer spending, but to become more bullish on retail, income growth and credit growth need to pick up, the analysts say.

There are three ingredients for above-trend retail spending, Citi analyst Craig Woolford writes in a note to investors: 1) Above-average income growth (missing). 2) Solid credit growth (missing). 3) Higher house prices (materialising).

The savings rates fell to 8.7 per cent in June, and is tipped by Citi to fall another 1 percentage point. The average household is saving $614 less a year, which may have boosted retail growth by 1.9 per cent last year, Woolford says.

He expects retail spending to grow 5.0 per cent in the next financial year, slightly ahead of the current one.

‘‘Investors should consider bottom-up factors influencing categories,’’ Woolford says. ‘‘We see cafés and restaurants outperforming, apparel potentially slowing beyond October 2014 and consumer electronics looking vulnerable, with a poor product pipeline.’’

Citi has a ‘buy’ rating on Super Retail Group, tipping a turnaround in its leisure segment and lower supply chain costs. Woolford also rates Specialty Group a ‘buy’, seeing it as a candidate to lift gross margins via direct sourcing. JB Hi-Fi, on the other hand is a ‘sell’, given the risk of declining comparable store sales, Woolford says.

With respect, pooppycock! If we get 5% sales growth next year we’ll be bloody lucky, which doesn’t mean it won’t happen, but luck is not a great investment case. Weirdly enough, the reasons retail will probably struggle are cited by Citi. Recall two chart from Gerard Minack in his recent MB special report. Non-mining profits are yet to correct post boom:

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And national income, which is getting hammered by the terms of trade falls, has a very tight relationship to non-mining sales growth:

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Retail is pennies in front of the steamroller.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.