Investor Spotlight: Navigating the retail landscape in 2023

Article writtten by Danielle Ecuyer

Where we are in the cycle

The pandemic impacts have stretched across all aspects of our lives and most notably it altered our spending patterns and the business paradigm for retailers. Retailers can be broadly divided into two sectors: consumer discretionary (all those goods you want but do not necessarily need) versus consumer staples (essential living items).

Both sectors have broadened their customer offering from in-store to online and most have an omnichannel presence.

The omnichannel evolution

Higher interest rates and the inflationary impacts on the cost of living have steadily been eroding built-up savings and available funds for consumption. In a post-pandemic world, the consumer has swapped the ‘shop-to-you-drop online’ for experiential services like eating out and you-only-live-once travel.

The current positioning and outlook for the retail sector

On balance, the August reporting season delivered a mixed bag of results across retailers in Australia. However, most analysts were pleasantly upbeat on a number of the results as they came in ‘better-than-feared.’ A recent survey by UBS found the consumer is bifurcated between income levels and across discretionary and non-discretionary items. Those with income greater than $100,000 are in a better position than the lower-income groups.

Trends from UBS

Looking at the combined report outcomes from UBS and Goldman Sachs, not only do the findings align but so do most of the stock calls. Please bear in mind, that these are two reports and do not reflect the full suite of expert opinion.

UBS forecasts

• A decline in spending on discretionary goods and services, although at a slower pace than the 2Q23
• Cost of living pressures will skew to essential household goods and services
• An “across-the-board reduction in home improvements”
• Domestic and International travel will flatten out
• Online consumption has fallen significantly and is not expected to pick up.

UBS overall trends

• Trading down in price points to more affordable items
• Shifting to in-home versus out-of-home.

UBS prefers exposure to the affluent (Treasury Wine Estates), younger teens, non-renters (Lovisa) and the older consumer, as well as the trade-down to Kmart (Wesfarmers). They recommend avoiding big-ticket retailers like Harvey Norman and retailers with exposure to middle-income sectors and COVID-19 beneficiaries.

UBS buy-rated stocks

• Lovisa for the store roll-out and the younger consumer
• Metcash for home improvement exposure (Mitre 10) and food resilience from IGA
• Treasury Wine Estates for exposure to the premium Penfolds brand and cost savings
• Wesfarmers, a trading-down beneficiary, and stay-at-home improvements (Kmart and Bunnings, respectively)
• Woolworths is well-positioned and a market leader in staples and essentials, alongside cost-cutting.

UBS sell-rated stocks

• Accent Group, showing slowing sales
• Domino's Pizza, which lost market share in COVID-19 and faces a slower recovery with higher costs
• Harvey Norman, too exposed to big-ticket sales
• Premier Investments and Super Retail Group, where sales are expected to slow.

Trends from Goldman Sachs

Goldman Sachs assesses the strength of the retail offering through the ability of the provider to offer “strategic objectives, notably personalisation, loyalty and supply chain improvements for staples.” Goldman Sachs rates Endeavour Group, Woolworths, Super Retail Group, Treasury Wine Estates and Corporate Travel as Buys and Coles, Premier Investments and Domino's Pizza as Sells.

Six stocks to watch

• Lovisa

Lovisa is a domestic and global fast fashion jewellery company with a $2.2 billion market capitalisation, which typically trades on a higher PER valuation. According to FNArena, the prospective multiple is around 26x with a 3.4% dividend yield and Bell Potter has a target price of $29, versus the average target price of $24.49.

FNArena forecast chart

Refinitiv forecast chart

Lovisa weekly chart

• Metcash

Metcash is a wholesaler and retailer in the grocery, hardware, liquor, and car accessory sectors with a $3 billion market capitalisation.

The company competes against Woolworths, Endeavour Group, Coles, and Bunnings and trades on a prospective multiple of 12.2x with a 5.5% yield according to FNArena. UBS has a $4.50 target price, and FNArena has an average target price of $4.10.

FNArena forecast chart

Refinitiv has a mean target price of $4 and four Buys versus two Sells.

Refinitiv forecast chart

Metcash weekly chart

• Treasury Wine Estate

Treasury Wine Estates is an $8 billion global wine company that owns Penfolds, the jewel in the crown. The stock is trading on a 22x prospective PER, a 3% yield with an average target price of $12.80, while Morgan Stanley is at $14.50 according to FNArena.

FNArena forecast chart

Refinitiv has an average price target of $13.07, eight Buy ratings, and two Sell ratings.

Refinitiv forecast chart

Treasury Wine Estates weekly chart

• Wesfarmers

Wesfarmers is a $60 billion market cap conglomerate with notable retail names Bunnings, Kmart, Target, Officeworks, and Catch. The stock is trading on a prospective 24x PER multiple and offers a 3.6% yield with an average price target of $49.94, with UBS at $57, according to FNArena.

FNArena forecast chart

Refinitiv has an average target price of $51.68, five Buy ratings and two Sell ratings.

Wesfarmers weekly chart

• Woolworths

Woolworths is a $46 billion food/grocery retailer with Big W. The stock is trading on a 25x prospective multiple and offers a 2.9% dividend yield with an average target price of $37.42 while UBS has a $43 target.

FNArena forecast chart

Refinitiv has a mean target of $40 with six Buys and three Sell ratings.

Refinitiv forecast chart

Woolworths weekly chart

• Endeavour Group

Endeavour Group is a $9 billion market cap retail operator of liquor suppliers, Dan Murphy’s and BWS, as well as a portfolio of hotels. The stock is trading on an 18.6x prospective multiple with a 3.8% yield and has an average target price of $5.92, according to FNArena.

FNArena forecast chart

Refinitiv has a mean target price of $6.07 with three Buys and four Sells.

Refinitiv forecast chart

Endeavour weekly chart