UBS downgrades 4 ASX retail stocks, revises earnings profiles of others

Consumer sentiment is at three year lows and near the kind of levels we would normally associate with recessions. Retail sales were flat in April, and have not grown by more than 2% month-on-month since the end of 2021. All of this, plus the fact you can’t possibly fit another barbecue in your backyard, is leading to material earnings re-rates for the retailers from UBS. 

In this piece, I’ll take a look at the earnings changes they are making with a special focus on the four companies they just downgraded. 

The survey says ...

UBS conducts a regular survey of Australian consumers to find out their spending intentions and the state of household savings. Its most recent research revealed five key takeaways:

1. Consumer spending expectations for the next 12 months are elevated yet converging across income groups. Spending on entertainment, food out of home and recreation could fall the most based on this survey.

2. Income growth expectations are falling.

3. Household savings have been used in the last 12 months to fund spending but consumers don’t expect to save much in the next 12 months.

4. Cost of living is increasing for all income earners but more so for low & middle income earners.

5. Domestic and international travel intentions are slowing, with savings a source of funding for travel for 60% of respondents. UBS also finds home improvement spending is starting to moderate.

So what does it suggest for retail earnings? Analysts Shaun Cousins and Jarrod Chisholm have the following theory.

“Sales and EBIT in FY23E remains above pre-COVID levels, yet this premium is forecast to narrow for many consumer discretionary retailers in FY24. Immigration is a tailwind to support elevated sales, but not in all categories,” they wrote.

The earnings re-rates

Harvey Norman (ASX: HVN) - UBS reduces EPS forecasts by 10% and 14% for FY24 and FY25 respectively due to lower sales and margins. The reduction also has a material impact on the stock’s one-year forward P/E, which now moves to 9.5x (and making it a classic value trap). SELL-rated, price target of $3.10/share

JB Hi-Fi (ASX: JBH) - The company has enjoyed earnings margin expansion due to operating leverage and reduced in-store discounting. But this is forecast to unwind as in-store discounting returns, rising labour and rent costs crimp earnings. Earnings forecasts are reduced by 9% and 2% in FY24 and FY25 respectively. NEUTRAL-rated, $45 price target.

Lovisa (ASX: LOV) - Despite an 11% and 13% fall in forward earnings projections for the next two years, the store rollout prospects are enough to keep this stock’s BUY rating. But the price target does get cut by $5 to $23/share.

Universal Stores (ASX: UNI) - UBS has a four-pronged reason for why Universal Store earnings might struggle. Not only is the cost of living crisis taking a big bite out of young people’s budgets but the store rollout has slowed due to macro uncertainty and a huge marketing spend. And yet, the stock remains a BUY with a price target of $3.30/share.

And now, the four ratings downgrades

Accent Group (ASX: AX1) moves from neutral to SELL, due to a higher risk of earnings erosion. Despite the long term tailwind of more distributed/vertical brands and an expected improvement from apparel brands, operating deleverage plus rising labour and rent costs will make the cost of doing business much more difficult. Price target also slashed to $1.60/share.

Premier Investments (ASX: PMV) also moves to a SELL given promotions will likely have to return as consumers are more discerning about where they spend their money. Premier also has the additional task of dealing with FX headwinds. EPS forecasts are reduced by 5% for FY23 and 17% for FY24, and the price target is slashed by $6 to $20/share. 

Super Retail Group (ASX: SUL) also has a lot to deal with. Not only must it deal with consumer headwinds, it must also contend with a supply chain that’s making life (and costs) difficult for some of its products. Increased promotion, analysts say, will likely hit its BCF brand the hardest. Price target moves to $10/share and it too gets cut to a SELL rating from a neutral.

Finally, Dominos Pizza (ASX: DMP) was cut last week to a sell with a price target of just $40/share following its earnings guidance warning. 

Source: UBS