Unwinding consumer demand to take a hit on stocked up ASX 200 retailers

A potential unwinding of consumer demand for bulky categories puts retailers like Wesfarmers (ASX: WES) at risk following an aggressive build up on inventory levels.

Hints from the US

US-listed Target shares dipped -25% last week after a wider-than-expected drop in earnings due to higher logistics costs and weak sales of discretionary items.

The contagion spread to local stocks, with most large caps, including Wesfarmers down at least -5% the following session. 

What was most interesting about Target earnings was that the company continued to experience strong growth and market share gains in food and beverage, and essential categories.

However, “in our other three core merchandise categories, apparel, home and hard-lines, we saw a rapid slowdown in the year-over-year sales trends beginning in March," said Target CEO, Brain Cornell.

“... we expect the consumers to continue refocusing their spending away from goods and services, we didn’t anticipate the magnitude of that shift.”

“As I mentioned earlier, this led us to carry too much inventory, particularly in bulky categories, including kitchen appliances, TVs and outdoor furniture. And with very little slack capacity after two years of unprecedented growth, we faced elevated costs to store and indicated rightsizing our inventory position.”

This trend was also observed in Amazon’s earnings, as “spending shifted somewhat away from more discretionary items …”. 

ASX-listed culprits

"We think Australian retailers will suffer a similar set of issues, and as such, we are avoiding the consumer discretionary names," said Aequitas Investment Partners in a note last week.

There are several potential bulky culprits in the ASX 200 including:

• Breville Group (ASX: BRG)

  • Kitchen and home appliances

  • -37.5% year-to-date (YTD)

• ARB Corp (ASX: ARB)

  • 4WD accessories

  • -43.6% YTD

• Harvey Norman (ASX: HVN)

  • Furniture and consumer electronics

  • -13.7% YTD

• Bapcor (ASX: BAP)

  • Automotive parts and equipment

  • -14.5% YTD

• JB Hi-Fi (ASX: JBH)

  • Consumer electronics and home appliances

  • -6.4% YTD

• Super Retail Group (ASX: SUL)

  • Automotive and outdoor equipment

  • -26.5% YTD

Taking a closer look

Super Retail

During February reporting season, Super Retail said that its brands (Supercheap Auto, Rebel, BCF and Macpac) all had elevated inventory levels to mitigate supply chain disruptions.

In the first-half, total inventory levels were up 30.6% compared to last year.

Source: Super Retail Group

Breville

Breville experienced a likewise increase in inventory, as payments to suppliers (and employees) rose 28% in the first-half to $774m from $606m a year ago.

As a result, operating cash flow dipped to -$57.3m from a healthy $43.4m in the first-half of FY21.

Food for thought

Its interesting to observe that JB Hi-Fi has managed to outperform, while names like ARB, Breville and Super Retail have been subject to sharp downward re-rates.

On that note, JB Hi-Fi didn't aggressively build up inventory in the first-half of FY22 and grew its cash flows by 91% to $850m.

Whereas Breville and Super Retail have committed to making sure the shelves are stocked up for customers.

Notwithstanding other factors such as valuations and earnings, it looks like JB made the right call.

JB Hi-Fi vs. other retail stocks (Source: TradingView)