According to the Australian Bureau of Statistics (ABS), preliminary retail turnover for July 2020 witnessed a month-on-month increase of 3.3% to $30,753.2 million. When compared to July 2019, the turnover witnessed a rise of 12.2%, predominantly due to the rise in household goods retailing. This came in after an increase of 2.7% in June 2020, which was predominantly driven by high month-on-month rises in cafes, restaurants, and takeaway food services along with retailing in clothing, footwear, and personal accessory retailing.
July Retail Turnover Primarily Driven by Sale of Households Goods: Off late, the rise in retail turnover has majorly been a result of increased purchases of household goods. In its announcement on preliminary retail turnover, the ABS noted that household goods retailing in the month of July increased by 30% on July 2019. The turnover was especially high due to an increase in the sale of furniture, white goods, and electrical items. Increased demand for cafes, restaurants and takeaway food services and sale of clothing, footwear, and personal accessory also shaped up the numbers in July 2020. The turnover increased in all states and territories except Victoria, due to the reinstatement of restrictions by the government.
Movements in Retail Turnover (Source: ABS)
Food Retailing Increased in Victoria: During July 2020, food retailing witnessed a rise of 1.2%, primarily due to an increase in supermarket and grocery store turnover in Victoria. This reminds of the changes in the consumer behaviour experienced during March, when the threat of COVID-19 was at its peak. Similarly, as Victoria recorded new COVID-19 cases and the government imposed strict restrictions, a new wave of panic buying hit the supermarkets and grocery stores. Notably, the majority of the businesses in the retail segment closed their retail stores in Victoria at the beginning of August for a period of six weeks. Overall retail turnover in Victoria fell by 2% as compared to June 2020, due to a reduction in cafes, restaurants and takeaway food services, department stores and clothing, footwear, and personal accessory retailing. On the contrary, supermarkets recorded a rise in food retailing, with sales of perishable goods and non-perishable goods up 15.4% and 14.3%, respectively, as compared to July 2019.
Key Risks: The current macroeconomic environment continues to be a threat to the retail sector. The process of adapting to the new normal can be disrupted by the second wave of coronavirus and reinstatement of restrictions in other states. The changes in Victoria provide a clear picture of how the retail turnover will be impacted in such a scenario. Sudden changes in consumer buying patterns represent another risk factor, which can have a substantial impact on retail figures. Since March 2020, the trends in retail turnover have been a result of the continuously evolving consumer preferences for food items, household goods, outdoor eating, etc. It is worth noting that over the past few months, retail turnover has increased on the back of substantial growth across one or more categories rather than a considerable increase across all categories. Henceforth, retail figures in the next few months will provide a better picture of the outlook for the sector. Moreover, businesses with large international exposure bear the risk of foreign currency fluctuations and a reduction in demand due to challenging economic conditions.
Notwithstanding the above factors, the retail sector retains a decent potential for growth due to the nature of goods and services being offered. The everlasting demand for these goods has helped the Australian retail sector to recover from COVID-19 shockwaves in such a short period of time. Pursuant to the closure of physical stores, retailers found their way to consumers through the online channel, reporting exuberant growth in digital sales amid the pandemic. The above factors represent the sector’s ability to remain resilient even during unprecedented adverse economic conditions.
By noting the patterns in retailing, investors can identify businesses that appear to be potential beneficiaries of the trends. Amid the current economic environment, the retail sector has been one of the few to weather the pandemic impacts and demonstrate recovery at a fair pace. Considering the most recent factors driving the retail turnover, let us have a look at few companies which are expected to grow with the emerging trends.
1. Kathmandu Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 783.45 Million, Annual Dividend Yield: 10.08% (price correction led increase))
Increase in Same-Store Sales: Kathmandu Holdings Limited (ASX: KMD) is a retailer of clothing and equipment for travel and adventure. In the recent business update, the company stated that easing of lockdown restrictions brought back its same-store sales growth to positive. For the six weeks from 18 May to 28 June 2020, Rip Curl same store and Kathmandu sales were up 21.0% and 12.5%, respectively. In 1HFY20, revenue went up by 56.7% to NZ$363.65 million. NPAT for the half stood at NZ$8.1 million.
Outlook: The company is focused on growing the core markets of Australia and New Zealand and is working on enhancing customer experience. The company completed a fully underwritten equity raising of NZ$207 million, strengthening its balance sheet and liquidity position. The company aims to further diversify the business and accelerate digital transformation and is confident about attracting long term customers for the Kathmandu, Oboz, and Rip Curl brands. At the end of FY20, the company expects to report liquidity in excess of NZ$300 million. EBITDA for the year is expected to be above $70 million and gross margin is expected to be at the lower end of the 61% - 63% target range.
Despite the impact of COVID-19 on in-store traffic, the company managed to withstand the crisis through its online channel. In April 2020, Kathmandu and Rip Curl continued to trade online in all international jurisdictions. Online sales during the month stood at 2.5 – 3 times higher than the previous year. Moreover, with the relaxation in restrictions, the company’s stores were reopened and exceeded the management’s sales expectations, further strengthening the business.
Key Risks: COVID-19 restrictions have impacted the company’s sales and supply chain which may result in a disruption in operating performance. Uncertainty regarding future economic conditions and lower foot-traffic are key potential headwinds. In addition, the business may suffer a setback if the demand for its goods slows down in the future. The company is also exposed to credit risk, interest rate risk, liquidity risk, and foreign exchange risk.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs KMD (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last three months, the stock gave positive returns of 22.10% on ASX and is currently trading below the average of its 52-week trading range of $0.469 - $2.611. The stock of the company has demonstrated stable movements amid these difficult economic conditions. This reflects the resilience of the business and its capability to defend itself against market abnormalities. Going forward, a strengthened balance sheet, strong online presence, and a return to in-store sales growth will be the key catalysts driving performance and the stock price. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of a low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $1.16, up 4.977% on 24th August 2020.
2. Myer Holdings Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 172.47 Million, Annual Dividend Yield: NA)
Focused on Deleveraging the Balance Sheet: Myer Holdings Limited (ASX: MYR) is primarily involved in retailing through department stores across Australia and online channel. In the recent business update, the company announced the temporary closure of its Melbourne stores for a period of six weeks. The company will continue to operate through its online channel and click and collect services during this time. It has also signed a term sheet to amend and extend its bank facility until August 2022. The size of the facility was reduced to $340 million, reflecting the company’s success in deleveraging its balance sheet. During 1HFY20, online sales climbed 25.2% to $168.2 million. Operating gross profit margin for the period increased by 39.14%.
Outlook: While the second half witnessed a significant impact of COVID-19, online sales during the period continued to report strong growth. JobKeeper payment from the government, disciplined cost control, and other payment deferrals have helped the business withstand the adverse economic conditions. Despite the store closures and reduced foot traffic, the company expects to report a small net cash positive position in FY20. The company expects to release its FY20 results on 7th September 2020.
Despite macro headwinds, the company has managed to maintain a strong foothold with its digital capabilities. Continued focus on profitable sales, disciplined cost management, and a decent balance sheet position will payback after the market stabilizes. Latest trends in retail sales and robust growth in online sales signal a brighter future for Myer Holdings Limited.
Key Risks: Temporary closure of stores and a reduction in foot traffic pose a threat to the financial performance of the company. Moreover, a competitive retail industry can impact performance in the form of new market entrants, change in consumer preference, and increased online competition.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs MYR (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last three months, the stock has corrected by ~22.22% on ASX and is currently trading close to its 52-week low of $0.083. Despite the adverse impact of COVID-19, the business has maintained its position in the market with a decent balance sheet position. The stock price may have suffered the impact of COVID-19 adversities but has a potential for growth on the back of MYR’s strong presence on the online channels and healthy balance sheet. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.220, up 4.762% on 24th August 2020.
3. Premier Investments Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.97 Billion, Annual Dividend Yield: 3.79%)
Record Growth in Online Sales and EBIT: Premier Investments Limited (ASX: PMV) is involved in operating specialty retail fashion chains within Australia, New Zealand, Asia, and Europe. The company recently updated that retail global sales for 2HFY20 (26 weeks ended 25 July 2020) are down 18% on pcp due to COVID-19. However, its online sales and EBIT growth continued to deliver record performance. Retail online sales were up 70% on pcp and stood at $123.3 million. Full-year online sales were up 48.8% on FY19 and stood at $220.4 million.
Outlook: The company expects 2HFY20 EBIT to be in the range of $58.7 million and $59.7 million, reflecting growth in the range of 9.7% - 11.7%. FY20 EBIT is expected in the range of $184.8 million - $185.8 million, representing growth in the range of 10.5% - 11%. The company expects to release its FY20 results on 18th September 2020.
The above guidance comes on the back of the benefits derived out of PMV’s cost out programs, significant online EBIT growth, gradual reopening across all locations, and the support from various global government rent and wage subsidy schemes. As the economy adapts itself to the new normal and demand across the retail sector continues to grow, PMV is expected to witness a further boost in its earnings.
Key Risks: The company has its operations in several locations, including Australia, New Zealand, Singapore, Hong Kong, Malaysia, The Republic of Ireland and the United Kingdom. Henceforth, movements in currencies with respect to the Australian Dollar will impact PMV’s financial position and results from operations. The company is also exposed to stiff competition across the retail platform. Threat of new entrants, new product lines, and increased online presence of retailers are few potential headwinds for the business.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs PMV (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last one month, the stock gave positive returns of 9.02% on ASX. The stock of the company has demonstrated a quick recovery from COVID-19 shockwaves and is currently backed by the company’s strong retail platform. Going forward, the company’s growing digital capabilities are expected to drive further growth in the business. We have valued the stock using the EV/Sales multiple based relative valuation method and arrived at a target price of a low double-digit upside (in percentage terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $19.170, up 2.349% on 24th August 2020.
4. Woolworths Group Limited (Recommendation: Hold, Potential Upside: High Single-Digit)
(M-cap: A$ 49.99 Billion, Annual Dividend Yield: 2.6%)
Decent Sales Performance in Q4FY20: Woolworths Group Limited (ASX: WOW) is engaged in food, general merchandise, and specialty retailing via chain store operations. In a recent update, the company announced its intention to extend the partnership with PFD Food Services by acquiring a 65% equity interest for $302 million. In addition, the company will acquire 100% of PFD’s freehold properties which primarily comprise 26 distribution centres. With the above decision, the company is aiming to unlock synergies across the combined network and fleet. The investment is expected to be earnings per share accretive in the first full year of ownership. The company reported strong Q4FY20 sales growth, with the highest growth rate of 27.8% across Big W stores. Recently, WOW’s 22 BIG W stores in metropolitan Melbourne were closed for a period of six weeks.
Outlook: For FY20, the company expects EBIT before significant items in the range of $3,200 - $3,250 million. Pre-tax significant items for the year stood at $591 million. Hotels EBIT is expected to be in the range of $160 - $170 million. The company expects to invest $700 - $780 million on its two distribution centres at Moorebank in NSW over the next 4 years, which will advance its localized ranging efforts through a capacity of holding more than 30% more products than existing facilities.
The company’s efforts to boost sales, manage costs, and invest for distribution expansion have laid the foundation for future growth. As the retail landscape recovers from COVID-19 impacts, the business seems to be well-positioned to take advantage of the opportunities that await in the future.
Key Risks: The business is exposed to strategic, operational, compliance and financial risks as it operates in a retail environment. These risks mainly relate to the rising market share of competitors, changing consumer preferences, supply chain disruptions, etc.
Valuation Methodology: Price to Cash Flow Multiple based Relative Valuation (Illustrative)
Price to Cash Flow Multiple based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs WOW (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: In the last three months, the stock gave positive returns of 14.76% on ASX. Despite the market fallout and continued uncertainty about COVID-19 impacts, the stock has depicted a remarkable trajectory, driven by the resilience of the business. The company reported a decent Q4 performance and is expected to witness further growth as market conditions gradually return to normal. We have valued the stock using the Price to Cash Flow multiple based relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $39.790, up 0.531% on 24th August 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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