I.  Sector Landscape and Outlook

Consumer discretionary sector broadly comprised of retailing industry with sub-segments in food retailing, brick-and-mortar department stores, furniture, electronics, clothing, footwear and fashion accessories, cosmetics, online retailing, casino gaming, household durables and appliances, and recreation and leisure services. The industry is largely driven by disposable income and household spending. The non-essential nature of the industry was significantly impacted by lockdown and mobility restrictions imposed during COVID-19. However, the reopening of the economy has improved the sentiments and spurred retail sales in majority of industry verticals.

As charted below, S&P/ASX 200 Consumer Discretionary Index has outperformed S&P/ASX 200 Index by a whopping 25.58% in the last 5 years.

Figure 1. S&P/ ASX 200 Consumer Discretionary (Industry Group) vs S&P/ASX 200 (*5 year)

Data Source: Refinitiv, Thomson Reuters *3rd December 2015 – 3rd December 2020; Chart Created by Kalkine Group 

Key Growth Drivers

As charted below, some of the growth drivers, which influences the sector demand going forward positively include increase in household consumption, surge in online sales, personal income supported by JobsKeeper Program, and reopening of stores and businesses etc.

Figure 2. Growth Leavers Driving Discretionary Spend

Source: Kalkine Group 

1) Household Spending Surpassed the Income Growth

Households prioritized essential-only spend during the pandemic curtailing discretionary items altogether. Spend on accommodation, recreation, clothing, footwear, furnishings were taken back seat, while expenditure on food rose (especially in Victoria) as households stockpiled due to panic or in anticipation of second lockdown. With easing of social distancing norms and travel restrictions, household spend increased across categories covering both goods and services. After receding to -12.5% in June 2020 quarter, household consumption made a remarkable recovery with +7.9% in September quarter, largest increase ever in the history of Australia.

Figure 3. Household Spend Recovered Sharply (QoQ)

Spend on services outpaced goods with +9.8% as people opted to dine out, participate in sports and recreation activities, travel to places with fewer restrictions, and visit to health providers. Following the stage 4 lockdown imposed by Victorian government in early August 2020, consumption restricted to stay-at-home orders. Victoria witnessed drop in consumption by 1.2%. Rest other states showed improved trend. Household spend on goods increased by 5.2% in September 2020 quarter as per the data released by Australian Bureau of Statistics (ABS).

Figure 4. Rebound in Household Consumption Across States Except Victoria:

Source: Australian Bureau of Statistics (ABS)

2) Stores Reopening and Resumption of Business Activities

Turnover at Australian businesses improved by 7.0% in September 2020 quarter (on QoQ basis) according to the data released by Australian Bureau of Statistics. All sectors showed recovery in September on a seasonally adjusted basis. Reopening of cafes, hotels and restaurants following easing of restrictions lifted the retail sales. With shops and malls reopened and onset of new season, household increasingly spend on clothing, apparel and personal accessories. However, discretionary products which peaked in June quarter, moderated. Spend on electronics grew modestly. Spend on home renovation and improvements which were increased in June quarter due to stay-at-home protocol eased in September quarter. As Victoria serves as a hub for businesses, imposing travel restrictions significantly impacted sales. Nevertheless, Victoria showed gradual recovery in September. Businesses in New South Wales recovered at a quicker pace.

Figure 5. Cafes and Clothing Stores Drove Retail Sales

Source: ABS, Chart by Kalkine Group

3) Rise of Disposable Income

The extension of JobKeeper scheme and moderate wage hikes in selected sectors drove the household income in September quarter. Sectors like healthcare and social assistance, and financial services reported wage hikes. Public administration/ public sector undertakings witnessed wage hikes which resulted in 0.1% growth in The Wage Price Index in September. Labour costs at private companies have increased following end of payroll tax waivers and return of superannuation and leave obligations. With improvement in sentiments, Australian businesses added more workforce. Labour participation rate improved to 65.8% in October 2020 over last month and unemployment rate broadly remained unchanged at 7.0%.

Figure 6. Increase in Share of Labour Income

Source: ABS

4) Trending Online Sales

Spending on discretionary products was lifted by proliferation of online sales. The pandemic altered buying preferences and shopping trends. Stay-at-home protocols and mobility restrictions increased the usage of online shopping. Retailers modified their fulfilment strategy with omni-channel initiatives like Buy Online Pick-up In Store, etc. Further, transition to ‘Buy Now Pay Later’ scheme saw rapid adaption by millennials and zillenials. Online sales penetration have increased since the beginning of COVID-19. From 6%-7% pre-COVID, online sales have increased to about 11% in September 2020 as per data provided by ABS. Social distancing and store closure at Melbourne following stage 3 and stage 4 restrictions saw manifold increase in online sales in August 2020.

Figure 7. Online Saw Moderation Due to Opening of Stores

Source: ABS, Chart Created by Kalkine Group

Key Risks or Challenges

Consumer Discretionary Sector is highly correlated to economic sentiments. Stimulus-led growth may not be sustainable in the medium term. The expiration of JobKeeper program in March 2021 may impact the household spending and demand. As labour costs for private companies increased, wage growth is unlikely in the immediate term.

Figure 8. Key Risks in the Consumer Discretionary Sector

With unemployment rate lingering at 7% pace, the economy needs a faster growth and bigger push. The household saving ratio although dropped in September 2020 but remained elevated at 18.9%. The higher ratio reflects less propensity to spend and it may imply panic buying by households during the pandemic. Private business investments demand recovered with -1.9% in September quarter as indicated by ABS data release. Business loans for purchase of property although picked-up in September, but still below to 2019 levels. Capex spend by businesses fell by 3.0% in September quarter over preceding quarter.

Outlook

Reopening of stores and relaxing restrictions in Victoria to generate more businesses in the near-term. As per the data from Australia Bureau of Statistics (ABS), companies in accommodation and food services and retail trade to likely see increase in revenues in December. This correlates to the Christmas shopping. In addition, the data states that retail trade may witness higher planned capex spend over the next three months. With new cases falling, the government may re-open the economy to a ‘COVID Normal’ by December 2020 as stated in its 3-step framework.

II. Investment theme and stocks under discussion (BRG, TAH, LOV and SUL)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on ‘EV/Sales’ method. 

1. ASX: BRG (Breville Group Limited)

 (Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 3.47 Billion)

Breville Group Limited is engaged in manufacturing and marketing of home appliances.

Valuation

2. ASX: TAH (Tabcorp Holdings Limited)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 8.58 Billion)

Tabcorp Holdings Limited operates as a gambling company providing gaming, wagering, and entertainment services. 

Valuation

3. ASX: LOV (Lovisa Holdings Limited)

 (Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$ 1.20 Billion)

Lovisa Holdings Limited (ASX: LOV) is an international specialist fast fashion jewellery retailer.

Valuation

4. ASX: SUL (Super Retail Group Limited)

Super Retail Group Limited (ASX: SUL) is engaged in operating specialty retail stores in the automotive, tools, leisure, and sports categories.

Valuation

Note: All the recommendations and the calculations are based on the closing price of 3^rd December 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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