Consumer Discretionary

Consumer stocks caught in the eye of today’s downturn: Coles downgraded to Sell

By Market Index
Wed 14 Sep 22, 5:34pm (AEST)
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Key Points

  • ASX-listed consumer discretionary and consumer-staples stocks fell -3% and -2.6% today
  • Domino’s was upgraded to Neutral from Sell
  • Coles was downgraded to Sell from Neutral

ASX-listed consumer discretionary and consumer staples stocks were in the crosshairs of today’s Federal Reserve-induce (The Fed) share market correction, with -3% and -2.6% falls experienced by the two sectors respectively.

These falls were only exceeded by the S&P/ASX 200 Information Technology (down -3.38%) and the S&P/ASX 200 Real Estate index (down -3.72%) today.

What spooked the market this morning were revelations in the US overnight that The Fed’s efforts to rein-in inflation, have to-date, been relatively ineffective.

Instead of falling month-on-month, headline inflation actually rose by 0.1%, taking the annual rate to 8.3%.

Other stocks in both sectors experiencing -2.00%-plus selldowns today were:

Coles downgraded to Sell

Adding to the downward pressure experienced by Coles (ASX: COL) today was a downgrade on the supermarket giant by Goldman Sachs to Sell from Neutral, which saw Coles down -3.35% heading into the close.

The broker downgraded Coles after factoring-in key takeaway from a GS Global Retail Conference in New York, along with recent easing of commodity inflation trends.

Goldman’s Sell rating on Coles is based on 3 key points:

Market share loss leading to slower sales and margins: Under-investment in omni-channel growth and consumer data is expected to result in market share loss to Woolworths (ASX: WOW).

Entering high investment cycle with margin pressure: Coles catch up investments in two automated supply chain solutions, Witron and Ocado, will put pressure on margins and returns.

Catch-up will take time: Digital and omni-channel transformation will be a long-dated process as data/digital capabilities take time to build/refine.

Market share loss

“…COL [Coles] has under-invested in its digital transformation and omni-channel strategy, which is the primary reason for structural market share loss,” the broker notes.

“Even though the company is stepping up its investments in supply chain, we would like to see the company better illustrate its end-to-end digital strategy including sourcing, warehouse/distribution, merchandising, consumer data/analytics and loyalty to ultimately drive ARPU and market share gains together with cost efficiencies.”

Digital transformation lag

Goldman’s new target price of $15.60 on Coles implies 9.5% share price downside, due to the supermarket giant lagging in the digital transformation stakes.

The broker believes this lag has resulted in market share losses for Coles, with entrance into a high investment cycle for digital and supply chain pressuring margins over FY23/24.

The broker’s FY23-25 net profit (NPAT) estimates are cut by -2.4%-8.9% to reflect lower comp growth as higher digital transformation related opex.

The broker’s target price implies FY24 P/E of 20.0 versus an historical average of 21.5.

Coles share price over three months.

Domino’s upgraded to Neutral from Sell

Goldman’s has upgraded its FY23-FY25 net profit (NPAT) estimates on Domino’s by 1.3%-8.1% on the back of moderating cost inflation that are expected to ease store economics and franchisee payback period.

Goldman’s Sell rating on Domino’s is based on 3 key points:

Weaker per store economics: Cost of goods sold (COGS) inflation combined with a post-covid weakness in home delivery (especially in Japan) is expected to impact sales and margins per store.

Lower than expected store roll-outs: High inflation and volume deleverage is expected to lengthen the franchisee payback period. Goldman’s expects FY22-24 store growth to be 6% versus management medium term guidance of 9-12%.

Worse than expected forex impact: While the translation impact of Domino’s 39% sales from Europe and 27% sales in Japan is well understood, Goldman’s notes that Japan sources 50%-plus COGS in US$ imports and would be subject to additional transactional margin impact given they cannot fully pass prices on.

The broker expects easing competition in home delivery to enable better than expected cost-pass-through.

Since applying its former Sell rating on Domino’s, the broker notes the stock is now trading down -16% versus the ASX200 (6%).

Goldman’s target price of $62.90 implies FY24 P/E of 27.4 versus an historical average of 29.0.

Domino's share price over three months.


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