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Top 5 ASX consumer stocks and the Covid-19 shutdown impact

We examine how the coronavirus has impacted some of Australia’s key consumer discretionary stocks.

With the Australian government shutting down entire sections of the economy, it should come as little surprise that a number of the country’s most well-known consumer stocks have faced heavy selling pressure in the last month.

In that period, JB Hi-Fi and Harvey Norman have both seen their share prices fall around 34%; Wesfarmers has dropped 22%; Flight Centre has cratered a staggering 71%, while Dominos has declined just 11%.

Totalling up the damage, Macquarie Wealth Management today noted that the consumer discretionary sector has been one of the hardest hit – dropping 39% since 20 February – compared to the broader market decline of around 30%.

And in an unfortunate twist, though many retail stores are technically allowed to remain open, in the current environment it is simply not financially viable for most to do so.

Illustrating that point in a rather dramatic fashion and as reported by the Sydney Morning Herald, billionaire retailer Solomon Lew last week said he would not be paying the rent for the '1250 retail stores owned by his Premier Investments for at least a month.’

Elsewhere, Myer has stood down 10,000 of its staff and JB Hi-Fi has temporarily closed its New Zealand business.

With such pressure coming into focus and as cap raises and bailout schemes seemingly pop up all over the Aussie market; many have begun to now intently focus on company-level balance sheet strength and liquidity metrics.

For sure, the faith some were assigning to EBITDA multiples is well out the door.

JB Hi-Fi, Harvey Norman, Wesfarmers, Dominos and Flight Centre share prices in focus

Looking at the outlook for those key consumer discretionary stocks, Macquarie posits that during the shutdown months we are likely to witness a move into loss making territory, though over the next year they will ultimately remain profitable.

Here, the investment bank argues that on a '1-month shutdown basis, the retailers remain cashflow positive.

However, 'On a 2-month forced shutdown FLT starts to lose money, but as we assume the business starts trading immediately after the shutdown the impact is relatively subdued at just $6m a month.'

By comparison, as part of their most bearish scenario, Macquarie sees a three month shutdown triggering a ‘15% contraction in sales for the remainder of the year. This sees JBH fall to breakeven and FLT lose $132m over calendar 2020.’

In such a scenario at least, the investment bank points out that:

‘The large retailers can withstand this scenario from a balance sheet perspective, but it does severely impact profitability.’

How to trade consumer stocks

What do you think: does this represent a buying opportunity or are some of Australia’s most popular consumer stocks set to fall further? Whatever your view, you can trade many of the consumer stocks we have discussed today – long or short – using IG’s world-class trading platform now.

For example, to buy (long) or sell (short) Wesfarmers using CFDs, follow these easy steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter ‘Wesfarmers’ or ‘WES’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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