2 retailers that have sold off (Citi rates one of them a buy)

Cost-of-living pressures are biting Australian retailers, as shown in some of the softer quarterly results handed down by a few companies in recent days. These include updates from furniture retailer Nick Scali (ASX: NCK) and electrical and consumer appliances retailers JB Hi-Fi (ASX: JBH) and Harvey Norman (ASX: HVN). 

JB HiFi’s chief executive yesterday said same-store sales at JBH fell 0.3% in the first quarter of calendar 2024 relative to the same period last year in a “challenging and competitive retail market”. The company’s shares were down 4.4% to close at $57.33.

There are mixed views on whether the worst is over for the consumer discretionary sector. On one hand, this week saw another pause on rate hikes from the RBA – as covered on Livewire Markets on Tuesday. But we’ve also seen a shift in tone from the central bank, with RBA Governor Michele Bullock refusing to rule out the prospect of further rate hikes.

Some of the sharpest falls of recent days were among maternity and baby goods retailer Baby Bunting (ASX: BBN) and homeware retailer Temple & Webster (ASX: TPW), which both delivered quarterly sales updates. 

Baby Bunting (ASX: BBN) 

• Rating: NEUTRAL 

• Price target: $1.59, down from $1.70 

BBN 6-month share price (Source: Market Index)

BBN’s share price has fallen 22% since management yesterday reduced its profit guidance for FY24 to $2 million – down from $14.5 million a year earlier.

 Based on the result, Citi analysts maintained their prior rating but dropped their target price.

Analysts in Citi’s small- and mid-cap team said: “While there are some signs of promise from the turnaround, we think earnings will remain under pressure without an improvement in the consumer, which seems to have deteriorated in Baby Bunting’s target demographic.”

“We also need more comfort that the company can leverage its scale to effectively respond to elevated competition in the nursery category.” 

On the back of earnings revisions, they lowered their NPAT forecast by $8 million to $3 million, “to reflect FY24 guidance, and weaker-than-expected LFL sales and gross margins.”

Temple & Webster (ASX: TPW) 

• Rating: BUY

• Price target: $12, down from $13

TPW 6-month share price (Source: Market Index) 

The homewares and furniture retailer reiterated previous guidance for EBITDA growth of between 1% and 3% for the quarter. But chief executive Mark Coulter warned that the overall category was down 4% since the start of the year, driven by cost-of-living pressures.

While the performance was in line with consensus expectations, a notable slowdown in pace from the fast growth seen in the early weeks has prompted concern from some analysts.

Citi analysts James Wang and Adrian Lemme, CFA emphasise that the 30% year-on-year sales growth for the second-half of FY24 so far is in line with their expectations.

Two concerns they noted were:

• moderating sales in the latter part of the quarter – versus a 35% gain reported in TPW’s February update

• the cycling of tougher comparable sales figures heading into the first half of FY25. 

But when they factor in the weaker growth seen in 2021 and 2022, they believe the compound annual growth rate implied by Citi’s revenue forecasts for FY25 “look more than reasonable.”

The Citi analysts also addressed concerns around the outlook for rising costs, which were above consensus expectations, believing they are “controllable” and will drive further market share gains.

“We see this as a favourable trade-off and prefer the company to reinvest to grow. Being a pure-play online company gives TPW flexibility in dialling up or down its costs when it so chooses,” said Wang and Lemme.

“By FY26e, even as marketing- spend-to-revenue falls, the dollar spend on marketing does not decline. This highlights the benefit of growing the business now.”