Most places you look, the narrative about the Australian consumer is one of gloom and doom. From sentiment surveys to the official retail sales statistics, the environment looks soft and the outlook uncertain.
But if you dig a little deeper, you will find that what consumers say and what they are doing are two quite different things. That has been the key takeaway from retailers reporting this earnings season.
Some segments of spending remain soft, particularly for old-school clothing stores under increasing competition from the international giants with their broader range and cheaper prices. Troubled fashion chain Noni B posted a 5.4 per cent slide in same-store sales and swung to a loss of $2.4 million; Hong Kong-listed Esprit has also had weaker Australian sales.
But there are several pockets of strength in retailing that suggest a more durable recovery in household spending is emerging.
Electronics have held up throughout, with Dick Smith sales up 2 per cent in the December half zooming up to 17 per cent growth in January and 10 per cent in February. JB Hi-Fi said same-store sales were up 7 per cent in January. MORE FROM VICTORIA THIEBERGER
The roaring housing market has underpinned double-digit sales growth at Bunnings, and analysts are forecasting over 10 per cent growth at the home improvement behemoth for the second half as well.
It was quite a shock to hear Wesfarmers chief executive Richard Goyder describe sales during the critical Christmas season as “pretty strong”. Total sales growth accelerated in the second quarter and when pressed, he said the sales momentum has continued into the early part of the third quarter.
Goyder believes that Australians shoppers "aren't feeling too bad at the moment". Sharply lower petrol prices and record-low interest rates are doing their part.
"I talk to CEOs of retail businesses around the world and they'll take Australia any day. And why? Because relatively -- although it's coming up a bit lately -- employment is still pretty strong in this country, interest rates are relatively low, fuel prices are putting money back into people's pockets,” he says.
This is the heart of the problem. Since last year’s budget, the federal government narrative of fiscal doom has cast an unnecessary pall over consumer confidence. Unnecessary because the manufactured ‘fiscal emergency’ is nonsense when you look at the real fiscal emergencies of other OECD economies. (Australia’s net government debt to GDP ratio is just 16 per cent, with interest rates at record lows.)
The economy is slowing, yet it is still growing at a faster pace than other OECD nations with the exception of the United States. While the spike in the unemployment rate to a high of 6.4 per cent was an attention-grabber, the 100,000 jobs that were created in the previous three months barely scored a mention.
Credit Suisse reckons Australians are the richest nation in the world, mainly due to property prices, with median wealth of $US225,000.
That could help to offset slow growth in wages and explain why consumers are prepared to spend in certain sectors such as electronics, online and home improvement. Even smaller retailers such as Nick Scali, Beacon and Super Retail Group have been upbeat.
Commonwealth Bank’s Business Sales indicator, which measures economy-wide spending, was running at an annual growth rate of 6.8 per cent in January, slower than in December but more than double the five-year average of 2.7 per cent. CBA says the cut in petrol prices is the equivalent of a 0.5 per cent cut in interest rates in terms of lifting household spending power.
Some market-watchers believe the better managed retailers are reaping the benefits of the patchy consumer environment, with a tight focus on pricing in particular.
Sales growth at Woolworths Ltd is expected to have lagged Coles, with flat group sales in the first half dragged down by underperforming Masters. Woolworths is due to report on Friday.
“For Wesfarmers, their business is better managed than most, so they are doing better as a result,” says analyst Sondal Bensan at BT Investment management.
That seems to have been the case at upmarket department store David Jones as well, under its new ownership of Woolworths of South Africa. Sales for the December half rose 2 per cent and operating profit rose 10.3 per cent in what chief executive Iain Nairn described as “significant” growth in year-on-year spending, helped by gains in market share.
Bensan expects a big improvement in comparable store sales for many retailers. In the first half of 2014, poor weather hurt apparel sales and there was a severe negative effect of the budget, so retailers will be comparing against four months of very weak discretionary spending.
“We could potentially see some big uplifts in the next few months as we both head into a better environment and cycle very weak comps (comparable sales). Comparable sales could be quite strong,” Bensan says.
For investors who have generally stuck with the two big supermarkets, a few select specialty retailers could provide some upside surprises. That’s if the lead-up to the next budget doesn’t destroy sentiment again.
SUL Price at posting:
$10.05 Sentiment: Hold Disclosure: Held
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