I. Sector Landscape

Australia’s consumer discretionary sector broadly encompasses household products, food retailing, footwear & accessories, clothing, online retailing, and department stores. Amidst soaring disposable income and resilient consumer spending, Australian retail activities generated 4.5% of the nation’s total gross value added (GVA) in 2020, amounting to ~$81.36 billion. In addition, the wholesale and retail trade industry secured $61.5 billion, 6.0% of foreign direct investment stock in Australia in 2020.

Key Macro Factors Driving the Sector

Scaling Domestic Demand: In June 2021 quarter, the domestic economy contributed a 1.6ppts rise in GDP, primarily delivered by increased public investment (up by +7.4%) and increased household spending (up by +1.1%). Furthermore, resilient growth of 7.0% in terms of trade was registered as the highest historical level.

Household Spending Resurges: Household spending widened by 1.1% in June 2021 quarter; however, it remains 0.3% below pre-COVID levels (December 2019 quarter). Spending on services expanded by 1.3%, primarily driven by a 25.4% uptick in transport services and a 2.2% recovery in hotels, cafes, and restaurants as containment restrictions gradually lifted and tourism activities increased.

Dip in Household Saving Ratio: The household saving to income ratio decreased to 9.7% from 11.6%, sustaining elevated levels. However, the decline exhibited a considerable rise in household consumption and a dip in gross disposable income. Overall, the ratio delivers a favourable leading indicator for the expected consumer spending surge.

Figure 1: Household Consumption Resurges to Clock Pre-COVID Levels

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Contribution from Retail Trade Performance

Retail Turnover Surges: Total retail turnover at current prices clocked $29.67 billion, a 1.3% uptick QoQ and 1.7% PcP for September 2021. On assessing monthly performance, clothing footwear & personal accessory retailing surged by 5.9%, followed by a 5.0% incline in cafes, restaurants & takeaway food services, and a 4.3% uptick in household goods retailing.

Performance of Retail Industries: Easing restrictions promoted consumer discretionary (non-food) industries, primarily attributed to 4.3% widened sales in household goods (dollar terms). The only non-food industry to witness a downswing was department stores, which edged down marginally by 0.3%. Food retailing countered the most significant fall of 1.4%, consistent with previous post-lockdown results.

Figure 2: Total Retail Turnover Entered Expansion Territory Since May 2021

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Substantial Support from Online Sales and E-Commerce

Total Online Sales Uplifted: Total online sales stood at $4.34 billion in September 2021 on a seasonally adjusted basis, primarily due to shifting consumer preference towards online retail. This was registered as the highest monthly level witnessed in history. Lockdowns in NSW, Victoria and the Australian Capital Territory (ACT) promoted online sales.

E-Commerce Activities Continues to Grow: In September 2021, the proportion of online sales for discretionary (non-food) products stood at 25.5%, the largest recorded eclipsing the previous record of 25.1%. Overall, retail witnessed turbulent growth amidst state restrictions and a global pandemic. However, despite these challenges, retail turnover manifested its non-cyclical traits on a sequential basis.

Index Performance

The ASX 200 Consumer Staples (GIC) Index and The ASX 200 Consumer Discretionary Index (GIC) Index posted 5-year returns of +60.49% and +80.30%, respectively. Changing consumer preferences, increasing millennials, rising household income, and resilient retail services are supportive factors driving sector gains.

Figure 4: The ASX 200 Consumer Staples (AXSJ) and The ASX Consumer Discretionary (AXDJ) outperformed the ASX 200 Index in the past five years by whopping ~22.80% and ~42.61%, respectively.

Source: REFINITIV as on 18 November 2021

Key Risks and Challenges

Figure 3: Key Drivers V/S Key Constraints

A potential decline in household spending looms on the risk of high inflation rates. Business sentiments exhibit turbulence as the growth rate for company gross operating profits shrink to 5.5% YoY in June 2021 quarter, a third sequential fall since September 2020 quarter. Service consumption growth slipped to 1.3% in June 2021 quarter relative to 2.5% assumed in March 2021 quarter, exhibiting a declining trend. Containment measures imposed in NSW, Victoria, and the Australian Capital Territory (ACT) asserted plunged sales levels in both states. Recent disruption in the global supply chain may vastly affect retail and wholesale trade in both traditional retail and online marketplace.

Outlook

RBA Drops Yield Target: As announced on 2 November 2021, the RBA decided to drop the yield target as the economy entered the recovery phase and progressed towards the target inflation rate.

Improved Wholesale Trade: Wholesale retail inclined by 1.1% in June 2021, primarily driven by increased wholesaling of motor vehicle parts and motor vehicles for commercial and passenger usage. The upscaling demand in motor vehicles delivers favourable prospects for discretionary products.

Compensation of Employees Surges: The compensation to employees expanded by 1.3% as hours worked and employment increased. This calls for a favourable incline in disposable income for the coming quarterly release and, in turn, an uplift in discretionary spending.

Growing Ecommerce Market: Australia, being the eleventh largest e-commerce market on a global scale, is estimated to clock US$32.3 billion by 2024. The growth in the e-commerce space has delivered significant support to discretionary consumption.

Promoting Digital Infrastructure: The Government has announced multiple digital development initiatives from a telecommunication and information technology perspective to boost e-commerce and online sales development.

II. Investment theme and stocks under discussion (DMP, CGC, CWN, ABY)

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 the ‘EV/Sales’ multiple method.

1. ASX: DMP (Domino’s Pizza Enterprises Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$10.97 billion)

DMP holds franchise rights for Domino’s brand and network in Australia, New Zealand, Belgium, France, the Netherlands, Japan, Germany, Luxembourg, and Demark.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 19.75% on 18 November 2021. Moreover, the stock might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple) given rising store counts, broad network sales and favourable margins. For valuation, peers such as Crown Resorts Ltd (ASX: CWN), Pointsbet Holdings Ltd (ASX: PBH), Collins Foods Ltd (ASX: CKF) are considered. Given the resilient financial health, discretionary support from online sales, rising investments for organic expansion, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the current market price of $125.360, as on 18 November 2021, at 01:09 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 1.36%.

2. ASX: CGC (Costa Group Holdings Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.40 billion)

CGC is engaged in horticulture business with principal activities that include growing berries, mushrooms, glasshouse grown tomatoes, avocados and citrus.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 17.82% on 18 November 2021. Moreover, the stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple) given favourable performance in Berry business, substantial yields or volumes from China and strong cash flow position. For valuation, peers such as Tassal Group Ltd (ASX: TGR), Huon Aquaculture Group Ltd (ASX: HUO), United Malt Group Ltd (ASX: UMG) are considered. Given the prudent working capital management, sustainable leverage, improved FCF, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the current market price of $3.020, as on 18 November 2021, at 10:34 AM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 2.98%.

3. ASX: Crown Resorts Limited (CWN)

(Recommendation: Hold, Potential Upside: Mid Single-Digit, Mcap: A$6.71 billion)

CWN is an entertainment company based in Australia with its operations in various integrated resorts.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 5.92% on 18 November 2021. The stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple) given improved efficiency potential under Remediation Plan. For valuation, peers such as Flight Centre Travel Group Ltd (ASX: FLT), Helloworld Travel Ltd (ASX: HLO), Corporate Travel Management Ltd (ASX: CTD) have been considered. Considering the strong balance sheet, successful implementation of Remediation Plan, government’s border reopening announcements, and valuation, we give a “Hold” recommendation on the stock at the closing price of $9.900, down by ~0.101% on 18 November 2021.

4. ASX: ABY (Adorable Beauty Group Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$451.79 million)

ABY is a pure-play online beauty products retailer in Australia. Its products include skincare, make-up, haircare, fragrance, wellness, and other related beauty products.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 12.12% on 18 November 2021. The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given favourable market opportunities, strong fundamentals, and an exponentially increasing customer base. For valuation, peers such as Temple & Webster Group Ltd (ASX: TPW), Redbubble Ltd (ASX: RBL), Mydeal.Com Au Ltd (ASX: MYD) are considered. Given the growing top-line, online BPC market growth forecasts, resilient cash flows, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing price of $4.750, down by ~1.042% on 18 November 2021.

Note: All the recommendations and the calculations are based on the closing price of 18 November 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the factors discussed above.

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