Macquarie backs Harvey Norman, Coles and Bega Cheese as consumer stocks turn expensive
Consumer stocks up 6.6% this year but Macquarie warns prices have run ahead of fundamentals with confidence still dragging on spending.
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KEY POINTS
- The S&P/ASX 200 Discretionary Index has gained 6.6% year-to-date driven by multiple expansion, but Macquarie warns share prices have run ahead of fundamentals as consumer confidence remains weak despite near-record low unemployment.
- Macquarie's top picks include Harvey Norman, Coles and Bega Cheese, while downgrading four stocks including JB Hi-Fi and Metcash to Neutral as valuations stretch to expensive levels.
- The discretionary sector is trading at price-to-earnings ratios close to one standard deviation above long-run averages, with consumer staples offering better relative value at around 20 times earnings.
Australian consumer stocks have gained momentum this year on expectations of an economic recovery, but Macquarie analysts warn that share prices may have run ahead of fundamentals as confidence remains the key drag on spending.
The S&P/ASX 200 Discretionary Index is up around 6.6% year-to-date driven by multiple expansion, and far outpacing the 3% gain from the Staples. However, Macquarie says system-level sales growth remains sluggish despite supportive economic indicators including near-record low unemployment and household income growth running at around 6%.
Confidence Still the Missing Piece
Consumer confidence measures continue to show uncertainty weighing on spending, with very modest per capita growth evident across high-frequency consumer data. Macquarie expects improving visibility on disinflation and Reserve Bank rate cuts to eventually support confidence and drive cyclical spending categories.
The RBA held rates steady at 3.85% at its July meeting, though Macquarie expects cuts in August, November and February 2026. The bank's macro team forecasts unemployment to rise modestly to around 4.3% over the next 12 months before stabilising at historically low levels.
Stock Picks and Downgrades
Macquarie has become more selective across the sector, downgrading four stocks as valuations stretch. The investment bank's key picks include Coles, Harvey Norman and Bega Cheese.
Harvey Norman remains attractive as its Australian business stands to benefit from a prolonged recovery in housing-related categories, while its valuation remains supportive relative to the broader market. Coles should benefit from supply chain investments and strong in-store execution. Meanwhile, Macquarie sees upside potential in Woolworths from business simplification efforts.
The analysts suggest waiting for pullbacks before adding cyclical exposure through JB Hi-Fi and Metcash after their recent strong runs.
Stocks to Avoid
Macquarie retains its Underperform rating on Sigma Healthcare, believing the market is giving too much credit to growth prospects despite expecting sector-leading earnings growth. The company's first result as a combined entity with Chemist Warehouse will be crucial for assessing growth potential and franchisee economics.
Endeavour Group faces increased caution ahead of the new CEO's formal commencement in early 2026, with rising competitive intensity, limited balance sheet flexibility and potential program cost downside weighing on prospects.
Ratings and Target Price Summary
Ticker | Company | Old Rating | New Rating | Old PT | New PT | % Chg |
|---|---|---|---|---|---|---|
BGA | Bega Cheese | Outperform | Outperform | $6.40 | $6.40 | 0% |
CKF | Collins Food | Neutral | Neutral | $8.40 | $8.50 | 1% |
COL | Coles | Outperform | Outperform | $23.10 | $24.10 | 4% |
DMP | Domino's Pizza | Neutral | Neutral | $30.50 | $18.40 | (40%) |
EDV | Endeavour Group | Neutral | Underperform | $4.10 | $3.80 | (7%) |
HVN | Harvey Norman | Outperform | Outperform | $5.50 | $5.90 | 7% |
ING | Inghams | Outperform | Neutral | $3.50 | $3.70 | 6% |
JBH | JB Hi-Fi | Outperform | Neutral | $111.00 | $112.00 | 1% |
MTS | Metcash | Outperform | Neutral | $4.00 | $4.00 | 0% |
SIG | Sigma Healthcare | Underperform | Underperform | $2.70 | $2.60 | (4%) |
TWE | Treasury Wine Estates | Neutral | Neutral | $8.50 | $8.40 | (1%) |
WES | Wesfarmers | Neutral | Neutral | $80.00 | $82.00 | 2% |
WOW | Woolworths | Outperform | Outperform | $33.60 | $33.40 | (1%) |
Source: Macquarie | July 2025
August Reporting Season Catalysts
Key catalysts for the upcoming reporting season include JB Hi-Fi's expected special dividend of around 80 cents per share, given its strong cash position and limited investment requirements.
Retail media opportunities present upside for major retailers, with Woolworths most advanced in the space while Coles and Wesfarmers increase focus on the growth area. Commentary on margin expansion potential from retail media investments will be closely watched.
Cost pressures remain a focus following the Fair Work Commission's 3.5% award wage increase from July, with companies including Inghams, Domino's, Harvey Norman and Woolworths facing particular scrutiny on cost management strategies.
Valuation Concerns Emerge
The Discretionary sector is trading at expensive levels both compared to history and relative to the broader market, with price-to-earnings ratios close to one standard deviation above long-run averages.
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Source: Macquarie Research
Consumer staples appear to offer better relative value, trading only marginally above long-run averages at around 20 times earnings and well below historical averages relative to the market.
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Source: Macquarie Research
