Window Opens On Consumer Trends

A window has opened on the consumer/retail sector, with the latest reporting season revealing changes to habits -short and long term – as a result of the pandemic and the lockdowns put in place to control the spread.

Goldman Sachs highlights a significant focus on managing short-term volatility and costs during reporting season. Consumers shopped in larger quantities, less frequently and increasingly online.

Retail trade over July and August posted like-for-like sales increases of 29% for discretionary items and 13% for grocery. Despite prior concerns to the contrary, total retail sales increased 12.8% in July 2020, up 6.3% compared with the 12-month average.

Nevertheless, given the quantum of lost sales in April — the peak of the lockdown — Morgans asserts revenue growth rates in the second half cannot be considered “ridiculous”. Growth rates averaged 6% across the broker’s coverage with notable outliers at the top end being JB Hi-Fi ((JBH)), Motorcycle Holdings ((MTO)) and Beacon Lighting ((BLX)).

Electronics, household goods and furniture sales were elevated and positive growth was recorded in clothing. UBS expects the benefits from at-home consumption and the reallocation of expenditure will continue but will be offset somewhat by a decline in government stimulus after September.

Deloitte Access Economics observes the headline numbers are masking significant divergence across the retail sector. Restrictions have meant expenditure at cafes, restaurants and catering services is more than -20% below pre-pandemic levels in July. In contrast, recreational goods, alcohol, electronics, hardware, building and garden supplies have all posted gains of 30% plus.

However, not all were intent on a retail splurge and the savings rate has also risen sharply, as households hunker down for uncertain times. Researcher David Rumbens expects some parts of retail will take longer than others to recover. Those that will take much longer will be department stores, catered food and apparel.

Still, the amount of cash being spread through the economy is unprecedented and, as Mr Rumbens notes, while employee earnings may have dropped over the June quarter household disposable income actually rose 2.2%.

Citi believes growth in cash flow to households is likely to slow materially in the December quarter and the issue retailers face is the degree of moderation that will occur as the stimulus unwinds.

As restrictions are eased more expenditure is likely to be directed outside of retail. The main swing factor, in Citi’s view, is how far households draw down savings. On the other hand, Goldman Sachs is now factoring in the maintenance of the home consumption trend for longer than previously expected.

While the pandemic remains a threat to communities, Morgans expects robust sales trends will persist. Anything to do with the home is likely to continue to perform over the balance of the first half. As Christmas comes into view the broker expects some strength in fashion, accessories and outdoor/leisure categories will emerge, providing restrictions don’t re-intensify.


Citi retains a preference for grocery, retaining Buy ratings for Coles ((COL)) and Metcash ((MTS)), over discretionary retail, given the earnings outlook and relative valuations. While discretionary retailer share prices are factoring in further earnings upgrades, and there is upside potential for first half consensus estimates, beyond this point risks are building.

Inevitably, retail sales growth will slow and the broker prefers those discretionary retailers that are factoring in less optimistic FY22 normalised earnings such as Super Retail ((SUL)) and Harvey Norman ((HVN)). The broker considers the valuations of Wesfarmers ((WES)), JB Hi-Fi and Lovisa ((LOV)) are stretched.

UBS notes those stocks that should be revisited post the reporting season and appear to have overreacted to the results include Costa Group ((CGC)), Adairs ((ADH)) and Domino’s Pizza ((DMP)). The latter has been investing in the business during the period and Goldman Sachs, with a Neutral rating, expects growth will accelerate strongly in FY21, calculating operating earnings growth of 19.5%.

Those that under-reacted to the results, in UBS’ assessment, were a2 Milk ((A2M)), Harvey Norman, Woolworths ((WOW)), Coles and Treasury Wine Estates ((TWE)). Goldman Sachs highlights the generally negative impact on sales from the pandemic for the latter, noting that, while the company’s new CEO has an optimistic view of restructuring, there was no specific guidance.

UBS isolates three opportunities worth watching, including a2 Milk, Harvey Norman and Woolworths ,while Goldman Sachs considers Harvey Norman is in a sweet spot, because of government stimulus. While not expecting Harvey Norman’s current level of elevated sales will be maintained, the broker believes the softer outlook is already accommodated in the “conservative” valuation.

Macquarie is of the same view, believing that despite material movements in the share price over 2020, valuation remains highly supportive. The broker also likes a reduced exposure to ancillary investments that is expected to encourage new investors.


In supermarkets, Goldman Sachs suspects lower award wage growth and ongoing goods inflation should all help to manage margins but the potential for recessionary conditions could increase the risk of price competition.

Coles is expected to experience comparable sales growth of around 2% in supermarkets and liquor is a key area to watch, in the broker’s view. Management is in the process of restructuring its liquor business and changes in the offer, pricing and store layouts are expected.

Meanwhile, online sales growth for Woolworths has been strong and the growing penetration of online and reduce store efficiency is the main theme for the longer-term sustainability of the company’s stores. Further clarity on the approach the company will take to the demerger of Endeavour Group could be a catalyst, Goldman Sachs asserts.

Macquarie agrees restrictions are likely to support elevated supermarket and liquor volumes but also highlights the strength in in the independents. Macquarie’s key stock ideas include Coles, Woolworths and Harvey Norman.


Online sales continued to go from strength to strength, accelerating rapidly in July because of the reinstatement of lockdowns in Victoria and surpassing previous highs recorded in April when there was a national lockdown. All categories recorded sales growth, led by games, toys and fashion and Morgans believes higher penetration rates for online are here to stay.

Coles and Woolworths exceeded the capacity of their online networks during the height of the lockdowns, Macquarie points out, which led to “underwhelming” second half growth for Coles. The broker notes Accent ((AX1)) indicated 50% of online customers in the fourth quarter had never shopped via digital means before, at least with its stores.

Adairs’ online sales were up 61.4%, Baby Bunting’s ((BBN)) online delivery sales grew 44% in the second half and City Chic’s ((CCX)) online channel grew to represent 65% of sales. For the first time since the coronavirus outbreak, Wilsons has included Adairs and City Chic as key picks in the retail sector.

Morgans maintains a constructive outlook for the sector but already finds evidence the market is starting to weigh up the strength some of the retailers will have to cycle in the fourth quarter of FY21 and the first half of FY22.

The broker considers Baby Bunting possibly the best placed retailer under its coverage in terms of growth and market position, but after a strong rally would prefer to buy on weakness. Morgans is prepared to be patient with Lovisa as a second phase recovery stock assessing that when it turns around it will be quick.

Eva Brocklehurst

About Eva Brocklehurst

Eva Brocklehurst started her journalistic career in 1993 as a financial reporter with RWE Australian Business News covering money markets and economic reports. She moved to Australian Associated Press (AAP) in 1998 as a senior financial journalist to cover money markets, economic analysis, Reserve Bank and Treasury. Eva became deputy finance editor at AAP in 2003. Started working online as a reporter on ASX-listed companies for RWE Australian Business News in 2005. Eva joined FNArena in 2012 and has been covering stockbroker analysis of ASX-listed companies since, as well as writing general news stories.

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