Retail is certainly on the nose, and rightly so. The forces working against it are many, from over geared households to the effect of on-line purchasing. But that does not mean that there is not value in teh sector, especially amongst the bigger players whcih are unliekly to go under. A UBS report asks the question: “Which retailers would miost benefit from a rate cut” which is the kind of question that can tease out where the value lies.
Never slow to capture the self evident, Morningstar is describing the problems in the sector in this way:
The retailing industry is undergoing many challenges and changes, both locally and globally. High levels of sovereign debt and the need for balance sheet adjustment in many countries suggests further headline buffeting of local consumer confidence. Relatively high levels of household debt locally, rising utility charges, a high A$ and changing purchasing technology platforms create conservative and innovative post-GFC shoppers. These are very different to their carefree predecessors who believed they could rely upon rising asset wealth to underpin the active use of credit card expenditure and housing backed debt for investment purposes.
Yep, that is why it has come off so sharply. But has it hit a bottom or is there more weakness to come? UBS looks at the historical effect of rate cuts and finds that it is a good counter cyclical play, even when the wider economy does not seem to favour investment in retail:
Of the 12 rate cuts since 2000 retailers have on average outperformed the ASX200 Industrials by 6.7% in the 3 months following a cut. The sectors that have generated the greatest outperformance have been household goods and (surprisingly) WOW/WES, while department store performance (DJS) has been inline. The outperformance in our view has occurred in anticipation of improving confidence and a consequent retail sales uplift, which have in most instances eventuated following an easing cycle.
Going to the really big players like Woolwotrhs and Wesfarmers is the obvious play for those feeling brave and counter-cyclical. But UBS does what many thought impossible: found a reason to invest in Myer:
Based on our assessment of the cost base of key discretionary retailers, we believe MYR has the highest level of operating leverage should sales improve ahead of expectations. We estimate every 1% sales beat would deliver a 3.2% EBIT upgrade, all else being equal. This compares to DJS and JBH who generate EBIT leverage 2.2x and 1.5x respectively. MYR’s superior operating leverage reflects: i) high fixed cost base with ~46% of CODB fixed on an ex-staff expense basis, ii) use of permanent staff & possibly less generous incentive programme relative to JBH, and; iii) A cost base capable of supporting a much higher level of sales productivity.
It is a big assumption that a rate cut will increase revenue; it might just as easily increase consumer pessimism and push them to save even more. Or it might simply slow the decline. But it does give a reason to like Myer for those bulls on the non-resources part of the Australian economy. Any takers out there?