Why this sector could surprise everyone again this ASX reporting season

The strength of the domestic consumer was a dominant theme last reporting season – where the results from a long list of retailers including Nick Scali (ASX: NCK), JB Hi-Fi (ASX: JBH) and Wesfarmers (ASX: WES) cruised past analyst expectations.

However, the current consumer landscape remains bearish at best. The latest Westpac Consumer Sentiment Index dipped 1.1% to 82.7, reminiscent of levels seen during the pandemic and Global Financial Crisis.

The Westpac report notes " fears of persistent inflation and further interest rate rises are again weighing more heavily on the consumer mood, offsetting any boost from the arrival of the ‘stage 3’ tax cuts and other fiscal support measures."

But the pessimistic consumer has continued to spend. May saw Australian retail turnover rise 0.6% month-on-month, tripling analyst expectations of a 0.2% increase. BS Head of Business Statistics, Robert Ewing, attributes this to "watchful shoppers capitalising on early end-of-financial year promotions and sales events."

In the past week, three relatively small ASX-listed retailers have reported surprisingly strong trading updates. Could this signal another round of impressive results for the retail sector in the upcoming August reporting season?

On the ground: Three bumper updates

Here are the key numbers and how the three retailers performed on the day of the update.

• Accent Group (+10.2%) – 2H24 like-for-like (LFL) sales up 4.1% and full-year LFL sales up 1.7% compared to Citi expectations of 1.0% and -4.4% respectively. FY24 EBIT to be between $123-125 million, down around 10% but above consensus $117.8 million (5.3% beat at midpoint). The company made a decision to exit 17 underperforming Glue Stores, where required returns were not being achieved.

• Michael Hill (+9.4%) – FY24 EBIT forecast at $14-16 million, vs. $14 million consensus. Group sales up 3.8% YoY, accelerating to 6% in FY24's final seven weeks.

• Universal Store (+5.3%) – FY24 Group sales of $288.5 million, up 9.7%. EBIT expected in $46-47 million range, up 15% and exceeding Macquarie's $44.2 million forecast.

Citi analysts maintained BUY ratings for Accent Group and Universal Store, suggesting the discretionary retail sector may have passed an inflection point based on the better-than-expected updates. In response to the trading updates:

• Accent Group: Citi raised FY25 and FY26 net profit estimates by 5% and 3% respectively, citing higher LFL sales and profitability. FY24 estimates were cut by 8% due to Glue store closures. Target price increased from $2.43 to $2.47.

• Michael Hill: A NEUTRAL rating and 66 cent target price was maintained as "the business is grappling with a difficult trading environment in midst of rebranding its business and clearing older stock."

• Universal Store: Citi significantly upgraded earnings forecasts, raising FY24 to FY26 net profit estimates by 2% to 21%, based on stronger EBIT guidance and sales growth.

Is price leading news?

JB Hi-Fi (ASX: JBH) shares have been on a notable upward trend, marking a four-day win streak and rising 5.5%, to record levels. Interestingly, this streak began the day after Accent's trading update.

JB Hi-Fi price chart (Source: TradingView)

The recent price rally has pushed the stock's price-to-earnings (PE) ratio to approximately 16.4 – its highest level since late 2020. This begs the question – Is JB Hi-Fi rallying in anticipation of a bumper FY24 result and/or forward looking guidance, or has the market jumped the gun?

A similar scenario unfolded during the February reporting season, when JB Hi-Fi had rallied around 25% since October 2023. However, it's worth noting that this earlier rally coincided with a broader market upturn, driven by lower-than-expected inflation data and the dovish repricing of rate cut expectations.

But JB Hi-Fi isn't rallying in isolation. Here's how other peers have performed:

• Wesfarmers: Up 11.5% this month to record levels

• Super Retail: Recovering from a Mar-May pullback, up 9% in the last four sessions to a four month high

• Harvey Norman: Recovering from an Apr-Jun pullback, up 3.3% in the last four sessions to a three month high

Short interest among retail stocks have also steadily declined over the past couple of months.

JB Hi-Fi 12-month short interest chart (Source: Shortman)

Harvey Norman 12-month short interest chart (Source: Shortman)

Overall, we're seeing retail stocks grind higher on the back of encouraging retail sales data and positive trading updates. The market is clearly positioned for upbeat full-year results. The 'price' in price-to-earnings among retail names has expanded, and now its time for earnings to do some of the heavy lifting. Will the numbers rise to the occasion this time round?