Quite interesting to look at the discretionary retail sector, as it is controversial. No doubt that the macro data are playing against this sector, as most households need to watch their spendings because of inflation and the pressure both on renters and mortgage holders. While their costs are also affected, in particular by higher wages. Almost all areas of discretionary spendings are under pressure. So far, Cettire (luxury) is the main exception, probably for different reasons : luxury spendings continue to do well (even if there are signs of weakness in the US and China), while Cettire does not hold any inventory (drop shipping model).
This situation is now quite well known, as so many retailers have already done profit warnings. No major good surprises are expected for retailers during this reporting season. The focus may turn to the guidance, as this tough macro environment may continue as long as interest rates continue to increase.
What may be more interesting is to try to identify the next step for the sector. Retailers have begun to react by reducing their new orders. Australian Retailers Association indicated that "orders are being reduced by between 5 % and 20 %, depending on the category". Given this tough environment, I expect retailers to focus in the short term on profitability of their existing stores, which probably means more store closures. There will also probably be a focus on inventory levels.
To be more specific, some criteria of companies which could recover faster than others : - companies with a limited level of inventory (so no need to do large promotions), - retailers more focused on the high end of the market, - retailers focused on customers who continue to do well (older customers, home owners with no mortgage...). - valuation supported by net cash and property assets. Among the listed retailers, Nick Scali is one worth watching.
