As per the latest buzz in the market, it is being evaluated whether the tightening of lending standards that has impacted the property prices and resulted in a housing downturn is now also seen to be impacting retail sector. Primarily, the rise in housing prices is being correlated to the sales and earnings of retailers while there are contrarian views. While there is no direct validation of the emerging norm, but retail sector scenarios of 2011 indicate that housing downturn was also accompanied by fall in earnings for the retailers. It is also key to note that factors such as population growth and technology advancement impact the retail sector and correlating this with housing downturn merely might look a bit inapt without looking at other factors. Thus, at the moment, this seems to be a mere pattern observed and given this backdrop, we now look at 3 retailers which are already trading under a challenging environment at the face of rising competition.

Harvey Norman Holdings Limited (ASX: HVN)

Decline in Franchisee Operations segment - Harvey Norman is a retail icon throughout Australia that consistently delivers an unparalleled retail offering to Australian consumers with an extensive product range, cutting-edge technology and market leadership in key product categories.Underlying net profit before tax ($296.08 million) for the half-year ending on 31 December 2017 was up by 0.8 per cent as compared to the corresponding period in the prior year while profit ($167.2 million) from franchising operations was down by 2.9 per cent as compared on pcp basis. The Company disclosed that Network Consumer Finance Pty Limited ACN, is a wholly owned subsidiary of HVN and NAB has recently assigned the NAB Debt and NAB Securities to NCF for a price of $36,057,428.56, with the consent of the Administrators. While these developments have been noted, the news thatonline retailer Kogan.com isentering the Australian whitegoods and kitchen appliance market with its own range of products has started impacting the stock.


Profit Performance as on 31 December 17 (Source: Company Reports)

Further, HVN’sbusiness has deteriorated in 2018 as consumer demand was showing a downward trend. In October and November, it finished the first of two stages of the Flagship complex at Auburn in Sydney. The property portfolio has gone from strength to strength over the reporting period, with the portfolio valued at $2.81 billion at 31 December 2017. The balance sheet continued to be strong, anchored by real property assets and a solid working capital position. The value of net assets increased by 4.2 per cent, or $115.96 million, to $2.88 billion at 31 December 2017, from $2.77 billion as at 31 December 2016. Given that HVN gets impacted by many economic conditions, we maintain an “Expensive” recommendation at the current market price of $3.52 while the Australian housing sentiments are also at the record low levels.
 

Wesfarmers Limited (ASX: WES)

Need of capital investment – Wesfarmers is in the news with its acquired equity stake in leading e-retailer ONTHEGO for digital offerings. Lately, Wesfarmers’ move to divest its Bunnings UK and Ireland business was noted to be on a positive side by many market experts and shareholders. WES is divesting the business to a company associated with Hilco Capital. It is expected that WES has a strong suite of businesses, with market-leading positions and Bunnings ANZ will continue to perform very well following industry consolidation. 40 per cent of Wesfarmers earnings before interest and tax (EBIT) comes from its hardware division Bunnings (and this might go up once Wesfarmers divests Coles). While the impact from housing trend is yet to be ascertained, the group faces challenges in Supermarket segment. 
 

Debt Maturity Profile for future periods (Source: Company Reports)

Meanwhile, the Group is targeting a higher capital weighting towards businesses with strong earnings’ growth prospects. The Group aims to underpin many opportunities to deliver superior returns from investment in existing growth businesses while leveraging assets and capabilities in adjacent & new opportunities. Since the start of the year, the stock was up by 1.80 per cent and by 3.03 per cent in last one month. The stock has crossed its 52-week high level and looks “Expensive” at the current market price of $45.67.
 

JB Hi-Fi Limited (ASX: JBH)

Negative effect from Kogan’s entry in whitegoods - JB stores offer the world's leading brands of Computers, Tablets, TVs, Cameras, Speakers, Home Theatre, Portable Audio systems, etc.The Group lately revised its guidance and now expects a lower NPAT ($230 million) against Company’s previous NPAT guidance ($235 million - $240 million) at the back of challenges from Home Appliance Market. In the third quarter 2018, JBH delivered a 6.8 per cent growth in the total sales (against 10.8 per cent noted in the prior corresponding period) and comparable sales growth of 4 per cent (down from 8.2 per cent of last year). However, The Good Guys’ total sales fell by 1.3% and the comparable sales fell by 2.9%. The Good Guys’ performance has been impacted due to the challenging conditions in the Home Appliance Market. This is the particular segment which is being correlated to house prices. With these shortcomings along with Kogan’s entry in the Australian whitegoods and built-in kitchen appliance market, JBH moved a bit lower. It was observed that about 18 per cent of JB Hi-Fi's earnings were in whitegoods following its Good Guys acquisition. Based on the foregoing, we give an “Expensive” recommendation on the stock at the current price of $ 23.60 as it is expected that challenging conditions in the Home appliances will be impacting the Group’s performance in short term.

 
Sales Growth (Source: Company Reports)

 
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