In this weeks’ video insight, I wanted to highlight some key takeaways from the reporting season, especially in the tech and retail sector. Retail’s results were mixed, with earnings per share declining in the second half of 2023. Predictions for fiscal year 24 and 25 estimates saw a slight downturn. In the tech sector, performance met expectations, with a noticeable focus on tech companies’ downgrading due to depreciation and amortisation, and capex concerns with a focus on cash flow and the underestimation of rising interest rates.
Transcript:
Today, we’re diving into the reporting season highlights for the tech and retail sectors. There’s a lot to cover so strap in!
Starting off with the retail sector, fiscal year 2023 (FY23) results for the Retail & Consumer sectors were mixed. A quick overview of earnings per share was a mid-single digit decline in the second half of 2023. Predictions for both fiscal years 24 and 25 estimates are down by half a per cent and 1.5 per cent respectively.
With respect to broker earnings revisions, companies including Harvey Norman Holdings Limited (ASX: HVN), Treasury Wine Estates (ASX: TWE) and Wesfarmers (ASX: WES) elicited the biggest upgrades with some brokers upgrading HVN by almost 20 per cent for fiscal year 2024 (FY24) citing higher franchisee sales and profit before tax (PBT) margins. On the flip side, Coles Group Limited (ASX: COL) prompted analysts to downgrade on the back of lower supermarket earnings before interest and tax (EBIT) margins thanks to theft, and Super Retail Group (ASX: SUL) thanks to a weaker outlook for Rebel.
Declining sales in discretionary retail in the second half of FY23 has continued to slowdown in the first few months of 2024, but an expected compression in EBIT margins was less than expected. The rising cost of doing business (CODB) is a focal point with some operators noting domestic transport, technology and labour and pain points. Interestingly, the CODB growth for the second half of 2023 (2H23) surpassed revenue growth and the forecast for FY24E predicts even more CODB pressures.
Elsewhere, depreciation and amortisation (D&A), and net interest are on the rise, impacted significantly by higher interest rates and increased post Australian accounting standards board 16 (AASB16) occupancy costs.
Now, here’s a word of caution: While the reporting season has had its silver linings and was better than expected, the Australian consumer is still treading carefully thanks to increased cost of living pressures. This is evident in the changing spending habits, with trends like trading down in apparel and food, and an inclination towards at-home consumption.
I caught up with a friend at the weekend who works for a large hardware chain, and he noted a definite decrease in basket sizes.
Some analysts have suggested investors focus their interest on businesses that target the affluent purchasers such as Treasury Wine Estates, the younger purchasers, like teenagers without rent pressures (think Lovisa) and retailers that benefit from lower priced products and the trend of trading down (think the Wesfarmers owned Kmart, for example). And just today, we’ve heard that consumer confidence remains in the doldrums.
Switching gears to the tech realm, performance was pretty much in line with expectations. Major beats included Megaport (ASX: MP1) and Hansen (ASX: HSN), while misses were seen from Seek (ASX: SEK), thanks to a normalisation in job volumes, NextDC (ASX: NXT) on the back of higher capex due to demand, and Appen (ASX: APX). Readers here at the blog will note we been pointing out the weaknesses in Appen’s business model from way back in 2019. With the share price now 96 per cent off its highs, our view about the long-term prospects for the company’s suite of services is broadly unchanged. Carsales (ASX: CAR) also beat expectations.
One thing that caught our attention in reporting season was more tech / growth names downgrading on the back of higher D&A / capex. This of course suggests cash flow will be a talking point. It is also fair to say analysts have underestimated the leverage to rising interest rates.
A lot of companies prominently featured artificial intelligence (AI) in their commentary or noted an intention to enhance their AI capabilities, but it was also the case, as we have noted here in several blog posts, that monetisation is key to a sustained increase in share prices, and that monetisation is still thin on the ground with opportunities limited.
Ok, that was quite a bit, and we have only discussed two sectors. We’ll continue to keep you informed and updated with key trends as we notice them emerging or evolving, so stay tuned.
The Montgomery Small Companies Fund owns shares in Super Retail Group, Hansen, and Megaport. The Montgomery Fund and Montgomery [Private] Fund owns shares in Wesfarmers and Treasury Wine Estates. This article was prepared 13 September 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade in Treasury Wine Estates, Wesfarmers, Super Retail Group, Megaport, and Hansen, you should seek financial advice.