ASX retail stocks are getting obliterated – But Goldman Sachs has a Buy on this one

If a retail company releases a market sensitive announcement – You better start running for the hills.

In recent weeks, there’s been no shortage of ASX-listed retail names like  Universal Store (ASX: UNI), Adairs (ASX: ADH) and Baby Bunting (ASX: BBN) selling off more than 10% after posting trading updates about subdued trading conditions.

The commentary has been rather depressing, with Universal noting “clear signs that the youth customer is seeing pressures on their discretionary spending levels,” while Baby Bunting flagged “unprecedented low” sales since the launch of its ‘Storktake’ promotional event – comparable store sales sit at negative 21%. 

“The Australian domestic discretionary retail space has continued to soften with April ABS retail data showing -10.3% You for Electronics & Appliances, +3.7% for Apparel, -0.2% for Footwear/Accessory and -3.6% for Furniture, Floor and Houseware,” said Goldman Sachs analysts in a note on Thursday.

“We now forecast total Household Final Consumption Expenditure (HFCE) growth of 4.9% CAGR in FY23-35e, with discretionary goods decline of 6.4% vs. other key categories’ single digit growth.”

Against the softening backdrop, Goldman Sachs reviewed its outlook for the four ASX-listed discretionary retailers under its coverage: Premier Investments (ASX: PMV), Super Retail Group (ASX: SUL), JB Hi-Fi (ASX: JBH) and Harvey Norman (ASX: HVN). 

• Downgraded Premier Investments to SELL

• Downgraded Harvey Norman to NEUTRAL

• Reiterated BUY on Super Retail

• Reiterated NEUTRAL on JB Hi-Fi

Stats to watch

A few quick stats from the Goldman note:

• Australian household savings to income ratio fell 3.7% in the March quarter 2023, to its lowest level since June quarter 2008 

• Scentre Group Jan-March 2023 sales growth across retailer categories showed Homewares are the weakest at -0.7%, followed by Fashion at 2.5%, Tech/Appliances and Leisure/Sports were stronger at 3.9% and 5.5% respectively

• Foot traffic is returning to store but eCommerce sales are declining (e.g. JB Hi-Fi website traffic for Jan-Apr 2023 down ~6% year-on-year)

• Most retailers are sitting on higher sales and same store sales vs. pre-Covid due to the incremental benefits of eCommerce as well as a recovery in “going out categories but sales/store expected to “mildly decline YoY or stagnate”

• As top line growth stagnates, a higher number of discounts are expected, which will see margin volatility for several retail names

Premier Investments: Downgrade on market share loss

Premier’s target price was downgraded from $25.30 to $21.0 to reflect post-Covid softness and market share loss as a result of rising competition from international entrants.

“While we recognize the growth potential of Peter Alexander and Smiggle and both have further international expansion opportunities, we are concerned about the more mature and domestically focused portfolio of Apparel Brands, which as of FY22 made up ~55% of group sales and ~65% of total store portfolio,” said Goldman Sachs.

Premier Investments 12-month price chart (Source: Market Index)

Super Retail Group: Backing market share gainers

“We view that SUL’s strong loyalty ~70% of total sales (as of FY22) is coming from members across 4 core brands as well as increased investment in loyalty rewards and personalisation will drive annual spend,” the analysts said.

“This will be the key driver of increased top line and margin resilience relative to other domestic discretionary retailers and remains our top-pick in this sub-sector.”

A Buy rating was retained with a target price of $13.60.

Super Retail 12-month price chart (Source: Market Index)