Best retail stock for your Christmas stocking

Industry data reveals a mixed bag on the consumer sentiment and spending front. Numbers gleaned from Morningstar Director Johannes Faul revealed that despite rising inflation and interest rates, Australians haven’t cut back their spending on the fun stuff such as technology and clothes.

Discretionary retailers such as JB Hi-Fi (ASX:JBH), Premier Investments (ASX:PMV) and Super Retail (ASX:SUL) have reported robust trading.

However, the outlook for these businesses will be a little challenging off the back of a more conservative consumer.

AMP Capital Chief Economist Shane Oliver believes that a slowdown in consumer spending is expected to emerge in the next six months. A view, it seems, taken by the Reserve Bank as it slowed down the pace of its rate hikes in November.

In his most recent note, Faul noted that consumer sentiment has been deteriorating in recent months and could translate into higher savings rates and less spending. The Westpac Melbourne Institute Consumer Sentiment Index fell to 78 points in November 2022 – similar to the lows seen in the early days of the pandemic and during the global financial crisis. Not surprisingly consumers with mortgages were among the survey respondents most concerned about their personal finances and the economic outlook

It's also not surprising that Faul expects sales growth to weaken as consumers tighten their belts and say goodbye to new whiz bang home gadgets and even camping holidays.

“Within demand for discretionary goods, we forecast sales to soften the most for retailers in consumer electronics, furniture, and recreational goods—including sports and camping gear”, Faul notes.

There is one business, however, that Faul likes, not only because of its price. Kogan (ASX:KGN) is also well positioned for an expected pickup in consumer demand for online retail. 

As an online pure play, “we expect Kogan to lap exceptionally strong COVID-19-induced sales sooner than its omnichannel peers, and we anticipate Kogan’s sales growth to reignite over the remainder of fiscal 2023”.

Morningstar has a fair value for Kogan of $10.70 compared with the price at the time of writing of $3.60.

Faul noted also that the sombre numbers around Christmas spending may not always translate into meaningful consumer behaviour.

According to the Westpac Melbourne Institute Consumer Sentiment Index almost 40% of respondents expect to spend less on Christmas presents than what they had planned in 2021, a similar level to 2009.

“But sentiment doesn’t always manifest itself in actions,” Faul says.

Here he highlights that the poor reading in 2009 due to the global financial crisis seemingly didn’t weigh on actual consumer spending.

In the two months of November and December 2009, total Australian retail spending increased by 5% compared with the previous period. During Christmas trading in 2008, total retail sales were up 4% on the previous period. 

Here’s hoping to a less than expected sombre Christmas and New Year.

First published on the Firstlinks Newsletter. A free subscription for nabtrade clients is available here.

Christine St Anne is communications manager at Morningstar Australia.Analysis as at 28 November 2022. This information has been provided by Firstlinks, a publication of Morningstar Australasia (ABN: 95 090 665 544, AFSL 240892), for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.