Retail woes

Picking the direction of retail demand is an issue assuming considerable importance for investors in the stock market.  It is a matter of deciding between two reversions to “normal” behaviour — consumption norms or savings norms. Many brokers are anticipating that consumer demand will be lower, but return to normal, which is why they have buys on a number of retail stocks. But there is another norm threatening that: a return to “normal” savings levels.

Southern Cross Equities plumps for the latter norm (see report). They argue there is a structural, not cyclical shift occurring with Australian discretionary spending that is being masked by strong macro economic indicators.

Australian households have completely pulled in their consumption horns. For a variety of reasons Australian households have lost confidence and remain in the most conservative mindset in over a decade.

The two speed economy is gaining pace. High house prices are creating a negative consumption effect, although not, so far, a negative wealth effect.

The Southern Cross report says:

…the “home equity ATM” has been turned off and households, due to the internet, have become far more price aware. They are now conditioned to wait for sales/bargains, and I truly believe pricing power has swung from retailers to consumers and that includes in supermarket retailing where we are now seeing all out price war between the majors.  Supermarkets will not prove defensive and are in the process of a medium-term P/E de-rating. Fights between two gorillas never end well. The only discretionary stock we recommend is the category killer JB Hi-fi (JBH), while CC Amatil (CCL) appears the only true “defensive growth” stock in the larger caps. The rest you simply don’t need to own until their multiples (and analyst commentary) starts acknowledging that this is a structural rather than cyclical event.

We also get this from Morningstar Equities, which notes that the household savings ratio has increased to about 10% for the first time on over two decades:

This is likely to be the beginning of a longer term skewing of the Australian economy towards the mining sector. Dutch disease on steroids because it is likely to be accompanied by reductions in household debt. It will inevitably have an effect on the stock market. There may be a cyclical return of consumer discretionary demand, but it will probably have to come through some form of income redistribution.

Meanwhile, the Southern Cross report points out, you can get Rio shares on half the multiple of Myer, and Woodside on the same multiple as Woolworths. I will only add that if you read Houses and Holes six months ago, none of this is news.

Southern Cross

Morningstar Equities

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  1. But my favourite economist has said everyone is delusional about retail:

    I agree about JBH and CCL. TRS is a good one too, but not sure how they are going to get out of the rebuilding of their distribution center from the Ipswich floods, nor the somewhat discretionary nature of the items available at their stores. With Coles and WOW on a price war, and ongoing Chinese inflation (i.e the end of cheap Chinese crap) that could be a problem.

    • Totally agree on TRS Prince.

      Did some work on it recently. Their 400+ store target is too optimistic in my view (mind you most of the future store rollout was in QLD if I recall it right).

      An excellent business that has performed remarkably, but methinks that growth is going to be harder to comeby. Thin margins come under pressure as it buids leverage and in house brand promotions by incumbents in supermarkets are another headache to worry about.

  2. Crocodile Chuck

    What Adam Carr (see link in The Prince’s comment above) and his ilk do not recognise (realise?) is that there is structural change in consumption for Australia’s aging baby boomers: after 50-55 they shift from consuming….to saving. Face it: after 50 or so people (‘consumers’) have all the schtuff they will ever have: a house, cars, flat screens, the works. Don’t be ‘long’ Harvey Norman!

    • Too true. What many fail to realise is that the last decade of “equity mate” simply brought demand forward and created unsustainable consumer spending patterns that were thus deemed to be “the new normal”. The problem is though that despite the disposable nature of modern consumer goods, big household items like TV’s, fridges, furniture are expected to last for around a decade or so before being replaced, and since most people bought up big in the l;ast 5 years, the demand has all but dried up. How soon before these figures begin to translate into job losses?

  3. how can they spend when they need credit for food?? the chains around the ankles are getting heavier every month