Australians expressed optimism in the economic recovery, with consumer confidence reaching pre-pandemic levels. The unemployment rate improved to 5.6% in March 2021 and disposable income surged by 2.1% in December 2020 quarter over the previous year. Supportive government policies and various stimulus programs boosted household spending. In the latest data by The Australian Bureau of Statistics, household spending rose 4.3% in the December 2020 quarter (on a YoY basis). This was followed by a record increase of 7.9% in the September 2020 quarter. The lifting of restrictions saw a revival in spending on hotels, cafes and restaurants, and recreation and culture. According to the Reserve Bank of Australia, the pandemic altered spending pattern. Sales of households and food outpaced discretionary spending and travel services during the lockdown. Early superannuation withdrawal scheme and tax cuts by the government lifted the overall sentiment and improved consumption.
In the preliminary data released by The Australian Bureau of Statistics, the seasonally adjusted retail sales improved by 1.4% to reach $30.72 billion in March 2021 over the preceding month. It was the highest increase in the past three months. On a YoY basis, retail sales improved by 2.3%. An uptick in cafes, restaurants, and takeaway food services contributed to the retail sales performance. Clothing, footwear and personal accessories retailing, and department stores also showed a significant improvement. By states, Victoria and Western Australia posted recovery after COVID-19 restrictions in February 2021. Both states posted the strongest growth of 4.0% and 5.5%, respectively, in March 2021 over the preceding month. Restrictions imposed during March 2021 impacted Queensland retail sales and Brisbane.
Figure 1. Retail Sales Posted Improvement:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
The initial period of the lockdown has created panic buying, and households rushed to supermarkets. However, this trend was subsequently reversed post easing measures. According to the National Australia Bank, spending on groceries deteriorated. Household spending on clothing, footwear and accessories took the lead, followed by cafes, restaurants, and takeaways. By states, Western Australia topped the chart in spending, followed by New South Wales and Queensland to remain in the top three. In the recent release by The Commonwealth Bank of Australia, debit and credit card spending by households showing steady growth at 12% for the week ending February 5, 2021 (on a YoY basis). Spending on goods surged 20%, while services improved by 5%. Household goods, food services, alcohol, and apparel are the top spending categories.
Figure 2. Spending Growth Trends:
Data Source: The Commonwealth Bank of Australia, Chart Created by Kalkine Group
The pandemic triggered a revolution in the e-commerce business, with every four out of five Australian households made online purchases in 2020. Online purchases touched $50.46 billion, recording a 57% jump over the previous year, according to Australia Post. Share of online sales reached 16.3% of the total retail sales in 2020. In the recent data by The Australian Bureau of Statistics, the nation posted a 53% increase in online sales to $2.95 billion in February 2021 on a YoY basis. Customers continue to show strong engagement with over 5.2 million households purchased online, according to Australia Post for the month of January 2021. All categories showed strong sales growth – food & liquor, home & garden, fashion remained the top categories. In the overall online purchase, New South Wales accounted a 34.0%, followed by Victoria (26.2%), and Queensland (19.2%).
Figure 3. Online Sales Drove Retail Sales During the Pandemic:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
Key Risks: According to the National Australia Bank, retail sales show moderation and spending pattern to normalize in the coming periods. The pandemic led retail boom in categories such as household goods to subsidies. Expiry of various government support programs to halt household spending. A recent survey by The Australian Bureau of Statistics mentioned that the early access superannuation schemes were predominantly used to pay off rental, mortgage payments, and household bills. The upward trending inflation (both consumer price index and purchaser price index) may pull down earnings power and affect spending. Australians continue to save more than spend, with household savings to income ratio remained high at 12.0% in the December 2020 quarter.
Figure 4: Key Risks Affecting Household Spending and Retail Sector:
Source: Analysis by Kalkine Group
Outlook: In a Quarterly Business Survey by National Australia Bank, business conditions rose 6 points to +17 index points in March 2021 quarter. Wholesale and retail businesses recorded the strongest business conditions. The survey also mentioned that capacity utilization in retail is well above the pre-COVID levels indicating a solid recovery. In a separate report by Westpac Bank, the consumer sentiments surged to an extraordinary 11-year high in April 2021. The pace of economic activity catch-up with reduced unemployment rates, improving housing affordability, and vaccine rollout, etc., are some of the driving factors. According to The Australian Bureau of Statistics, businesses in the retail sector expressed optimism in meeting the financial commitments over the next three months. Retail sector was placed in the third position for being healthy financial resources. Considering the developments in the retailing sector in Australia, we have figured out 4 stocks on ASX that are set to see the momentum.
(1) Temple & Webster Group Ltd. (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.13 Billion, Annual Dividend Yield: 0%)
Scaling the Business Through the Acquisition of New Customers: Temple & Webster Group Ltd (ASX: TPW) is engaged in the online retail of furniture and homewares products in Australia. In FY20, revenue increased by of ~74% YoY to $176.6 million, led by 96% growth in H2FY20 vs pcp on the back of high demand from active customers. Further, it successfully completed the placement of $40 million equity shares to strengthen the balance sheet, initiated small investment into an AI-based interior design start-up and launched the mobile app in July 2020. It had achieved new milestone in the business with ~32-million-page impression, ~3.8 million website users, ~200 subcategories. Importantly, active customers increased 77% YoY to about half a million with growth across both first time and repeat customers, and brand awareness grew to 35% in FY20. Meanwhile, the EBITDA margin jumped to 4.8% in FY20 vs. 1.2% in pcp, led by a rise in gross margin and tight management of fixed costs.
Its H1FY21 reported a revenue growth of ~118% on a YoY basis to $161.9 million led by a combination of active customer rise and revenue per active customer. During the said period, TPW launched an iOS app and set of AI-generated room ideas, AR/3D team and capabilities, and extended tech and product team (onshore & offshore). Further, the national TV Campaign increased brand awareness to 55%. Also, it has reported an increase in revenue per active customer, up 6%, led by a higher repeat rate. EBITDA margin came in at 9.3% in H1 FY21 as against 3.2% in pcp due to increase in scale, decrease in fixed costs (as % of revenue), and rise in dollar revenue per active customer. Finally, reported cash stood at $85.7 million as of December 2020.
Outlook: Broadly, the company is riding on the $14.6 billion market size for the furniture and homewares category. It is constantly looking to acquire new clients and to do so, it is using data to expand the range of products and fill price and product gaps, followed by accustomed to machine learning forecasting software for inventory management and geographical diversification of factories into Indonesia, India, and Europe. It has plans to increase brand awareness from 55% to 80% through digital and non-digital channels.
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 TPW (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month negative returns of ~26.91% and ~0.41%, respectively. It is currently trading above to the average of 52-week high price of $14.050 and 52-week low price of $3.360. The stock outperformed the market volatility index driven by robust growth in online sales channel during the pandemic. 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 mean EV/Sales (NTM Trading multiple) citing increased online penetration, strong brand awareness, and growth strategies in widening geographic reach. For this purpose, we have taken peers such as Mydeal.ComAu Pty Ltd. (ASX: MYD), Adore Beauty Group Ltd. (ASX: ABY), Cettire Ltd. (ASX: CTT), to name a few. Considering the strong growth in revenue and margin expansion, adequate liquidity, valuation, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $9.830, up by 4.685% on 26th April 2021.
(2) Myer Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 246.38 Million, Annual Dividend Yield: 0%)
Refocusing Merchandise and Online Sales to Lead the Growth Trajectory: Myer Holdings Ltd (ASX: MYR) operates and manages 60 department stores across Australia and owns the online sites contributed 17% of total sales in FY20. For the year ended 2020, total sales fell by 13.6% YoY to $2,519.4 million, with comparable-store sales down 3.3% on the back of billing loss due to closure of stores during complete lockdown period in the country. However, the cosmetics business led by skincare, fragrances and wellness products reported a triple-digit growth of 218%. Further, the online sales reported at $422.5 million, up 61.1%. It has received an extension from existing lenders till August 2022, providing a stable platform. Profitability fell with net losses at $172.4 million in FY20 owing to lower revenue despite a fall in Cost of Doing Business (CODB) by $138.6 million to $863.8 million that includes government subsidies and rent waivers during the period.
In H1FY21, MYR reported a fall in total sales by 12.3% to $1,190.2 million with fall in comparable sales by 3.1% (up 6.3% if CBD stores excluded) on the back of closures and reduced CBD traffic. However, online sales jumped by 71.0% to $287.6 million, striving the company to be one of Australia’s largest and fastest-growing online retailer, led by a rise in Beauty products that jumped 129% YoY and Homewares up 116% YoY. Online growth momentum is the result of an effective media investment profile and the establishment of 3PL, delivering cost per order efficiencies. EBITDA margin fell to 3.6% in H1 FY21 vs. 7.8% in pcp.
Outlook: The management is optimistic about future growth based on strategies drawn on the Customer First Plan and its drive to push a retail plan that will continue to provide acceleration. The company is planning to increase order flexibility, reduce buying cycle and lower inventory, improved merchandise offers in key sections of the product, and accelerate core supplier growth and consolidation.
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 3-month and 6-month returns of ~-3.077% and ~+31.25%, respectively. It is currently trading below to the average of 52-week high price of $0.415 and 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 median EV/Sales (NTM Trading multiple) citing ongoing costs cutting strategies, reducing store opening costs, and execution of the Customer First Plan. For this purpose, we have taken peers such as JB Hi-Fi Ltd. (ASX: JBH), Michael Hill International Ltd. (ASX: MHJ), Autosports Group Ltd. (ASX: ASG), to name a few. Considering the strong performance of its online beauty products, strong cash balance, valuation, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $0.315, up by 5.00% on 26th April 2021.
(3) Harvey Norman Holdings Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 6.89 Billion, Annual Dividend Yield: 7.05%)
Expanding Overseas Presence: Harvey Norman Holdings Ltd (ASX: HVN) operates as integrated retail, franchise, property, and digital enterprise. It has 194 franchised complexes in Australia, and 107 company-operated stores overseas. HVN reported a 5.3% YoY rise in revenue to $3.49 Billion in FY20 through company-operated stores, while revenue from franchisees jumped by 11.9%. Higher net sales from franchisees broadly led by a rise in profitability of the franchising operations segment in FY20. The company opened 5 new stores in Malaysia in H1FY20 and opened an electrical outlet store at Takanini, South Auckland, in March 2020. In-line with this, the company plans to open 12 new stores in FY21 in Ireland, Sligo, Croatia, New Zealand, Southeast Asia, Singapore, and Malaysia. Robust sales from company-operated stores translated to an increase in cash flows.
Its H1FY21 consolidated revenue grew by 27% YoY to $2.28 billion, comprised of company-operated sales revenue of $1.47 billion, revenue received from franchisees of $742.07 million, and revenues & other income items of $123.70 million. EBITDA margin jumped to 32.2% in H1 FY21 vs. 23.0% in pcp, on the back of song revenue from franchisee business and company-owned stores. Net profit after tax (NPAT) grew by 116.3% YoY to $462.03 million. Further, it reported a positive net cash position of $21.75 million (cash net of interest-bearing loans and borrowings) and net debt of $553.23 million at the end of H1FY20.
Outlook: The management is cautious about the ongoing impact of COVID-19 on the communities served by the company. However, it has extended its focus on customer delight strategy, customer’s engagement with its brands and quality of product and services across its value chain. These fundamentals will drive the growth momentum that is cemented in the past. Further, due to the current circumstances, it is focused on the convenience of home delivery and contactless click and collect strategy.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 HVN (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~1.89% and ~17.43%, respectively. It is currently trading above to the average of 52-week high price of $6.090 and 52-week low price of $2.580. The stock outperformed the market volatility index. We have valued the stock using the EV/EBITDA 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 some discount as compared to its peer average EV/EBITDA (NTM Trading multiple) citing the expiry of the JobsKeeper program may affect discretionary spending as households utilized government programs to shore-up income levels. For this purpose, we have taken peers such as Lovisa Holdings Ltd. (ASX: LOV), Reject Shop Ltd. (ASX: TRS), Vita Group Ltd. (ASX: VTG), to name a few. Considering the growth in franchisee business, margin expansion, store opening plans, we give a “Hold” recommendation on the stock at the current market price of $5.390, down by 2.532% on 26th April 2021.
(4) Super Retail Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.85 Billion, Annual Dividend Yield: 4.26%)
Growing the Four Core Brands: Super Retail Group Ltd (ASX: SUL) operates as a retailer of auto, sport and outdoor leisure products in Australia and New Zealand. It has over 697 retail stores. In FY20, it reported an increase in revenue by 4.2% YoY to $2,825.2 million led by an increase in sales from the Supercheap Auto segment that grew by 7.6% YoY to $1,119.7 million, followed by a rise in the BCF segment by 4.0% YoY to $535.0 million and rise in Rebel segment by 2.2% to $1,038.6 million. Further, the like-for-like sales growth reported at 3.6%. The online sale that accounted for 10% of total sales, jumped by 44.4% YoY to $290.5 million, where Q4FY20 alone reported a double growth. Further, over one million new online customers joined SUL in FY20, and the conversion rate was up across brands. Further, the EBITDA margin grew to reach 18.7% in FY20 vs. 11.6% in pcp, led by a significant rise in the Supercheap Auto segment by 11.9% YoY to $174.7 million. Meanwhile, SUL successfully completed the equity funding of $203 million in July 2020 to cover future liquidity requirements. It will continue to invest in Omni-retail capabilities supply chain investments, simplification of the business model and working capital to take advantage of rising sales in special categories, organic & inorganic growth to gain market share.
Its H1FY21 consolidated revenue reported a double-digit growth of 23.1% YoY to $1,776.3 million, led by a significant rise in Supercheap Auto by 20.2% YoY to $661.9 million, on the back of strong like-for-like sales growth by 19.6% and contribution from new stores. EBITDA margin expanded to 23.3% in H1 FY21 (vs. 17.7% in pcp), driven by strong revenue growth in segment revenue. Operating cash flow reported at $420 million, $180.9 million higher than pcp. Total capital expenditure at $29.4 million, included $19.0 million spent on Omni-retail and IT projects and $10.4 million on new stores and refurbishments.
Outlook: The management is keen on its planned strategy, which includes growing the four core brands, leveraging closeness to the customer, focus on the omni-retail supply chain, simplifying the business, and excelling in the omni-retail segment. Further, the Supercheap Auto segment recycled ~1.3 million litres of oil and 79,000 car batteries, Rebel started an in-store sports shoe recycling initiative and capitalize on champion women’s sports. These developments are expected to provide the right growth momentum in future periods.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 SUL (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~5.93% and ~6.21%, respectively. It is currently trading above to the average of 52-week high price of $12.890 and 52-week low price of $5.435. The stock performed well over the market volatility index. We have valued the stock using the EV/EBITDA 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 mean EV/EBITDA (NTM Trading multiple) given the focus on growth in core segments and growth strategies in omni-retailing. For this purpose, we have taken peers such as Beacon Lighting Group Ltd. (ASX: BLX), MotorCycle Holdings Ltd. (ASX: MTO), Shaver Shop Group Ltd. (ASX: SSG), to name a few. Considering the strong profitability in H1 FY21, investments in IT/ online sales channel, valuation, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $12.320, down by 2.532% on 26th April 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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