Last year’s JobKeeper payments provided a handy tailwind for many of our discretionary retailers, particularly those with a strong online presence. But was this as good as it gets? It looks like it, if the recent sell-off in some of our better known retail names is anything to go by.
As the screenshot of the leaders and laggards in the ASX Consumer Discretionary index reveals (Figure 1.) some meaningful falls were experienced by investors in companies including Accent Group, Baby Bunting and Nick Scali.
Figure 1. Some retailers hit hard
There are a number of factors at play here but perhaps the most useful is what I refer to as the ‘Economics of Enough.’
Shortly after the commencement of last year’s lockdowns, confined consumers flush with JobKeeper handouts, and nowhere to go, discovered the joys of shopping online.
This truth was reflected in the very material revenue growth numbers reported by retailers in the first half of FY21. Consider, for example, JB Hi-Fi’s revenue performance for the first seven weeks of FY21 when like-for-like sales were up 44.2 per cent. Consider also Kogan’s HY21 results with revenue up 89 per cent year-on-year.
For many businesses the boost to revenue was accompanied by solid gross margins. Amplified demand and limited stock, along with long wait times for some goods, meant there was little need for discounting during the 2021 financial year. Referring to JB Hi-Fi again, their Good Guys business reported a 189 basis point improvement in gross margins selling fridges, coffee machines and vacuum cleaners. Kogan also demonstrated the benefits of gross margin improvement with gross profit for the first half of FY21 up 126 per cent year-on-year.
But all that could now be changing
A coffee machine, fridge or vacuum cleaner isn’t a repeat purchase, not annually anyway, and the consequence of the slowdown in demand – even with meaningful fiscal and social welfare support, will be lower volumes and a return to discounting by retailers. And keep in mind what happens when 80 per cent of the population is fully vaccinated; spending will be redirected to restaurants, travel and entertainment. Shopping for another printer for the home office will suffer from the shift in spending towards services rather than goods.
We believe Australia is blessed with some amazing retailers and discretionary consumer businesses – ARB and Reece come to mind immediately – but investors must now start to be more discriminating. Selecting the right management teams implementing a successful strategy will be far more important than when a friendly tailwind was all that was required.