The retailing industry in Australia showed resilience during the pandemic, with large numbers of retailers shifted to online mode and offered ‘click and collect’ contactless shopping experience. Retailers prioritized investments in various omni-channel initiatives and offered digital payments such as Afterpay. The Buy Now Pay Later (BNPL) took shape during the pandemic with about 6 million active users in Afterpay and Zip Co. as of December 2020, according to the data by The Reserve Bank of Australia. BNPL becomes a preferred mode, particularly for fashion categories. The data also showed that credit card purchases dropped by over 6% in 2020.

According to eBay, an increase in the number of snap lockdowns coupled with holiday seasons saw a surge in orders from New South Wales, South Australia, Queensland, and Western Australia. The pandemic has created a jolt in spending patterns, with grocery retailing saw a surge in spending since February 2020, at the expense of cafes, restaurants, and takeaways, as per the market trends observed by CBRE Group, a real estate investment firm.

In research on household buying intentions by The Commonwealth Bank of Australia, there were marked improvements in spending intentions by households covering broad categories in April 2021 over the previous year, as listed below. Compared to 2019 levels, retail spending was much improved in clothing, footwear, groceries & supermarkets, department stores, household furnishing and equipment stores, stationery & office supplies, digital apps, and pet shops.

Figure 1. Spurt in Intention to Spend Covering Broad Categories:

Data Source: The Commonwealth Bank of Australia, Chart Created by Kalkine Group

As depicted from the below chart, retail sales in Australia nosedived in April 2020 and made a sharp rebound in subsequent months. The eBay data showed Australians have increasingly spent on health (face masks), entertainment (puzzlers), fitness (running, yoga), and working from home (computer monitors) product categories during the pandemic in March 2020. Changing population demographics led to the surge in online shopping. By volume of shopping done online, Generation Z took the podium with a 57% share, followed by Millennials (49%), Generation X (39%), and Baby Boomers (25%). Retail sales, according to The Australian Bureau of Statistics, continue to show positive momentum with a 1.1% increase in April 2021 (on a seasonally adjusted basis) to reach $31.05 billion. Due to the low base in last year, YoY growth stood at 25.1%. By states, New South Wales and Victoria contributed to the rise, with sales in Sydney and Melbourne made a comeback. Sales in Western Australia was impacted by lockdown during the month.   

Figure 2. Retail Turnover Continues to Hold Momentum:

Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group

While National Australia Bank remains positive on the outlook, the boom in household goods and department stores saw during stay-at-home protocol may fade away, and the extent of outdoor spending categories such as clothing and footwear and hospitality replacing the former is yet to be seen. The bank’s Cashless Retail Sales Index posted a month-on-month growth of 2.0% in April 2021. In a separate report by the Australian Retailers Association, Mastercard SpendingPulse data has revealed that clothing categories spend surged 178.5% in April 2021, indicating a strong comeback of discretionary spending by Australians. The data also mentioned that spending on departmental stores and household goods surged by 42.2% and 6.9%, respectively, on YoY basis.

The panic buying during the start of the pandemic saw a spike in food retailing, as shown in the below chart. Australians rushed to departmental stores following the lockdown restrictions. The closure of food services and restaurants made home cooking a mainstay. The easing of restrictions made the food retailing trend fade away, but mini lockdowns in certain states have resulted in an increase in food retailing off late. As per the Australian Bureau of Statistics, food retailing outgrew retail sales in April 2021 by +1.50% compared to the preceding month.

Figure 3. Food Retailing Made a Comeback:  

Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group

Australians have increasingly spent on supermarkets. After registering a fall in February 2021, retail turnover for perishable goods (fruit, vegetables, meat) increased by 8.1% in March 2021, according to the Supermarket spend data by the Australian Bureau of Statistics. Non-perishable goods (flour, sugar, canned fruit) increased by 14.8% (M-o-M basis), followed by other products (cleaning products, toiletries, etc.) with 8.0% growth.

Key Risks: The Westpac Consumer Sentiment Index fell 4.8% in May 2021, implying scepticism on the economic recovery in the near-term. It seems the federal budget led down the household expectations. The Westpac Bank is of the view that mini-lockdowns in various cities break away from the recovery. As a result, retail sales in Western Australia, Queensland, and New South Wales underperformed in Q1 FY21. In a survey by KPMG, retailers mentioned the supply-chain disruptions as the biggest risk element to manage during the pandemic. The household savings ratio, although dipped to 12.0% in the December 2020 quarter, it remains heightened compared to the historical average. A higher savings ratio indicates a lower propensity to spend.  

Figure 4: Key Risks Affecting Retail Sales: 

Source: Analysis by Kalkine Group 

Outlook:  Australians were increasingly spending on online sales. On a seasonally adjusted basis, online sales, as per The Australian Bureau of Statistics, rose 2.0% in March 2021 as compared to the preceding month. Australians are expected to do 40% of shopping online in the next 2-3 years, according to eBay. The Westpac Card Tracker Index made a four-week high reaching 107.2 for the week ending May 8, 2021. On an annualized basis, the index stood at 7 points above its pre-COVID levels, implying a rebound in spending by Australians. CBRE Group is expecting retail sales to remain elevated for the first half of 2021. In the 2021-22 budget, the government has allotted $1 billion to the JobTrainer program, which will benefit the retail industry as the industry employs about one in ten Australians. Further, the tax cut by the government is expected to boost household spending. Considering the developments in retail sales and food retailing, we have figured out 4 stocks on ASX that are set to see the momentum. 

(M-cap: A$ 653.55 Million, Annual Dividend Yield: 0%)

Resilient Operations Benefited from Integrated Businesses: Synlait Milk Limited (ASX: SM1) is engaged in the production and distribution of milk, milk powder products, and ingredients. The company remains profitable despite COVID-19 disruptions during FY20. Its revenue witnessed 27% growth (YoY basis) to ~$1.3 billion. Sales volume increased across segments, with fresh milk, and cream sales completed its first full year of production. The company able to ramp-up capacity with Lactoferrin reached a full capacity of 33 MT. Infant milk production at Synlait Pokeno was increased by 50%. The company achieved EBITDA growth of 13.2%, with a margin reaching 13.3% in FY20. Increase in distribution costs and general operating costs contracted margins.

In H1 FY21 results, SM1 experienced reduced pull from consumer-packaged infant formula, while powders and cream and Lactoferrin volumes were firmed up. Its Dairworks segment, which offered cheese and butter products, showed strong demand, particularly from Australia. This segment alone contributed NZ $112.6 million to overall revenues. The company continue to optimize production facilities for Lactoferrin, which had seen production improved by 16%. EBITDA margin dipped from 12.4% in H1 FY20 to 7.3% in H1 FY21 owing to change in product mix and increase in inventories. Operating cash flows turned negative to NZ $69.1 million (vs. inflows of NZ $12.1 million in pcp) on the back of a surge in receivables and shipping delays affecting the timing of collections. During the period, SM1 raised NZ $200 million, which was used to repay the debt of NZ $196.1 million. 

Outlook: SM1 is expecting the ongoing shipping delays to continue to linger around operations and to affect FY21 sales. The company to adopt a conservative approach for managing inventories. It is expecting a full-year net profit after tax loss of between NZ $20-30 million in FY21. The company has nil capital rising plans. It is in negotiations with banks seeking a waiver for covenants.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Price/Earnings Per Share 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 SM1 (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted 3-month and 6-month negative returns of ~28.96% and ~48.45%, respectively. It is currently trading below the average of the 52-week high price of $2.640 and the 52-week low price of $7.110, indicating an accumulation opportunity. The stock underperformed the market volatility index. We have valued the stock using the Price/Earnings Per Share multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight discount compared to its peer average P/E (NTM Trading multiple) as the management is expecting net profit for FY21 to be a tad lower than FY20. Further, in the recent development, the company’s CFO, Angela Dixon, resigned effective May 14, 2021. For this purpose, we have taken peers such as Select Harvests Ltd. (ASX: SHV), Elders Ltd. (ASX: ELD), Bega Cheese Ltd. (ASX: BGA), to name a few. Considering the integrated businesses, synergies from the newly acquired Dairworks segment, equity fundraising, we give a “Speculative Buy” recommendation on the stock at the current market price of $2.820, down by 5.686% on 24 May 2021.

(2) Myer Holdings Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 258.70 Million, Annual Dividend Yield: 0%)

Refocusing Merchandise: Myer Holdings Limited (ASX: MYR) operates 60 department stores across Australia. In FY20, total sales fell 15.8% to $2,519.4 million, with comparable-store sales down 3.3%. Further, operating gross profit (OGP) was down 17.6% to $957.3 million, and OGP margin was down 85bps to 38.0%. Meanwhile, continued focus on costs saw Cost of Doing Business fell by $138.6 million to $863.8 million, including benefits from government subsidies and rent waivers during the period. In addition, EBITDA was down 41.6% to $93.5 million. Importantly, the company is focused on making bigger supplier network, offering high-quality brands and products at great value led by enhancing Polo Ralph Lauren, Tommy Hilfiger, and Industry ranges.

In H1 FY21 total sales were down 13.1% to $1,398.0 million, indicating store closures and reduced foot traffic for the period, particularly in the large CBD stores Melbourne, Sydney, and Brisbane. Further, comparable-store sales fell by 3.1% while up 6.3% excluding the six CBD stores. Meanwhile, reported continued growth in online sales that grew 71.0% to $287.6 million, reflecting 21% of total sales and one of the largest and fastest-growing online retailers in Australia. In addition, operating gross profit (OGP) margin fell by 55 basis points to 38.6%, led by lower margin sales in apparel categories, and Cost of Doing Business (CODB) was down $86.0 million to $325.2 million, including JobKeeper wage subsidy and rent waivers. Importantly, EBITDA declined by 1.7% to $214.6 million, while statutory net profit after tax was up 76.3% to $43.0 million.

Outlook: As per the management, online sales are expected to provide future growth led by deepening commitment with MYER one with online tag rate jumped 21% YoY with strong upside for continued growth and effectiveness as the company leverages insight and data. Further, online profit contribution continues to grow through a strong, effective media investment profile and introduction of 3PL, delivering cost per order efficiencies.

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 MYR (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted 1-month and 6-month returns of ~+3.33% and ~-16.22%, respectively. It is currently trading above the average of the 52-week high price of $0.390 and the 52-week low price of $0.180. The stock performed well over the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer average EV/Sales (NTM Trading multiple) as the company delivered five consecutive halves of lowered operating costs with the improved balance sheet. Further, the company has ensured that it was able to withstand the challenging operating environment and focus on future developments. For this purpose, we have taken peers such as Coles Group Ltd (ASX: COL), Ridley Corporation Ltd. (ASX: RIC), Metcash Ltd. (ASX: MTS), to name a few. Considering the robust online sales growth, cost reduction strategies, valuation, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.310, down by 1.588% on 24 May 2021. 

(3) Coles Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 22.14 Billion, Annual Dividend Yield: 3.63%)

Smarter Selling: Coles Group Limited (ASX: COL) operates as a retailer in Australia. For FY20, total sales revenue stood at $37,408 million, while earnings before interest and tax were $1,762 million, and net profit after tax was $978 million. The full-year dividend stood at 57.5 cents per share. At the same time, EBIT grew 4.7% to $1,387 million on a retail basis, the first increase since FY16. Statutory profit after tax fell 9.3% to $978 million, driven by lower Express earnings and a reduced net profit contribution from significant items relative to the prior year.

In H1 FY21, total revenue increased by 8.1% to $20.4 billion, led by comparable sales growth of 7.2% in Supermarkets, 15.1% in Liquor, and 9.9% in Express. Further, reported strong EBIT and earnings per share growth of 12.1% and 14.5%, respectively, while cash realization stood at 120%. A fully franked interim dividend stood at 33 cents per share, up 10% on the 1H20 interim dividend. Meanwhile, supermarkets' customer satisfaction was up by 3.9pp to 89.8% compared to 2H20.

Outlook: The company is seeing some reversal of the local shopping trend as customers become more confident in shopping in larger centres resulting in the stronger performance of shopping centre stores. Consistent with Supermarkets, Liquor will be cycling the elevated sales due to COVID-19, which will present challenges given the fixed cost nature of the Liquor business. Gross operating capital expenditure for FY21 is expected to be ~$1.1 billion. The additional funds will be used to invest in opportunities that have arisen out of COVID-19, including Coles Local acceleration, eCommerce, and operational efficiencies in stores such as the customer packing benches.

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 COL (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted 3-month and 6-month returns of ~+3.47% and ~-7.19%, respectively. It is currently trading below the average of the 52-week high price of $19.260 and the 52-week low price of $15.040. The stock performed well over the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer median EV/Sales (NTM Trading multiple) considering Coles’ store network and format renewal program for FY21 that is unchanged with plans to renew ~65 stores and to open 15-20 new stores in FY21. For this purpose, we have taken peers such as Synlait Milk Ltd. (ASX: SM1), Elders Ltd. (ASX: ELD), Metcash Ltd. (ASX: MTS), to name a few. Considering the improvement in customer visitations, the surge in comparable-store sales in H1 FY21, dividend distributions, we give a “Hold” recommendation on the stock at the current market price of $16.660, up by 0.361% on 24 May 2021.

(4) Domino's Pizza Enterprises Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 8.99 Billion, Annual Dividend Yield: 1.29%)

Expanding Network: Domino's Pizza Enterprises Limited (ASX: DMP) operates retail food outlets. For FY20, global food sales increased 12.8%, while Same Stores Sales posted +5.8%. Online sales grew +21.4% to $2.357 billion, underpinned by customer preference to order and pay online. Further, underlying EBIT reported at $228.7 million, up +3.6%. Meanwhile, maintained a strong balance sheet and cash flow position throughout. In addition, expanding network with 163 new stores. The combined contribution delivered EBITDA of $83.4 million up 1.8%, on Network Sales of $1,234.43 million and up 2.8% on a Same Store Sales basis.

In H1 FY21, global food sales increased by $260.8 million to $1.84 billion, up 16.5% YoY, up 8.5% on a Same Store Sales basis, and reported EBITDA of $218.7 million, up by 23.8%. The performance reflects the benefits from investing in, and strengthening, the franchisee base and expanding store footprint on a global scale. It opened 131 organic new stores, 5.0% of the network, with significant contributions from Japan (+68 new stores), France (+19 new stores), and Germany (+15 stores).

Outlook: On the back of strong H2FY21 and Network Sales up 20.9% (+10.1% on a Same Store Sales basis), the company continues to expand further. The team’s agile response to changing conditions has lifted expectations for FY21 to be even higher than the already positive, medium-term outlook. Driven by a strong balance sheet and franchisee profitability, the company intends to accelerate expansion.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative) 

Price/Earnings Per Share 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 DMP (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~3.53% and ~42.70%, respectively. It is currently trading below the average of the 52-week high price of $115.970 and the 52-week low price of $59.670. The stock outperformed the market volatility index. We have valued the stock using the Price/Earnings Per Share multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms).  We believe that the stock might trade at some premium as compared to its peer average P/E (NTM Trading multiple) as the management remains active in seeking additional Domino’s territories where they deliver value. Further, the company has a single-minded focus, clear strategy, and long-term decision-making capabilities that are expected to deliver value for franchisees and customers well into the future. For this purpose, we have taken peers such as Crown Resorts Ltd. (ASX: CWN), Murray Cod Australia Ltd. (ASX: MCA), Woolworths Group Ltd. (ASX: WOW), to name a few. Considering the leadership position, healthy same-store sales in H1 FY21, store rollout strategies, we give a “Hold” recommendation on the stock at the current market price of $108.700, up by 4.569% on 24 May 2021. 

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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