It’s annual general meeting (AGM) season and our teams are furiously note-taking at dozens of company briefings where the opportunity to provide analysts with an update on trading conditions over the months of September and October is taken seriously.
Many analysts went into the AGM season thinking the updates from retailers would be soft, that higher mortgage rates and cost of living pressures associated with fuel and utilities would have eroded savings and eaten up tax refunds by now, triggering a wave of wallet-zipping.
So far, analysts and economists have been wrong.
As an aside, it’s not just in Australia that resilience is surprising analysts. Last week the U.S. Bureau of Economic Analysis revealed Q3 gross domestic product (GDP) grew by an annualised 4.9 per cent quarter-on-quarter (QoQ), which was the fastest growth in six quarters. Third-quarter growth was significantly faster than FY 2022 growth, which was estimated at 1.9 per cent.
Relevant perhaps for this blog post, Q3 U.S. real consumer spending rose by 4.0 per cent, up from just to 0.8 per cent in Q2.
Returning to Australia, retailer trading updates have generally been more robust, with sales momentum accelerating in recent months. The bigger listed retailers with non-food exposure, including Woolworths (ASX: WOW) (Big W), JB HiFi (ASX: JBH), Super Retail Group (ASX: SUL), and Nick Scali (ASX: NCK) – who collectively generate a meaningful high-single-digital percentage of total non-food retail sales – have already reported accelerating momentum or healthy sales. Another interest rate rise may be on the cards depending on the extent of slowing sales among most other discretionary retailers.
Super Retail Group provided a robust year-to-date (YTD) update. Like-for-like group sales accelerated in September and October. Consequently, they are now tracking ahead of analysts’ estimates, as is gross margin, which looks headed for about 46 per cent for the first half of the financial year 2024 and a good 20 basis points above expectations. Of course, the key November and December trading period, which includes Black Friday, Christmas and Boxing Day is still to come, as is another Reserve Bank of Australia (RBA) meeting. Understandably, analysts aren’t racing to upgrade their expectations for FY24 just yet.
The key take-outs from Super Retail Group’s latest update are that first-half FY24 YTD sales are up two per cent, which, given previous flat first-half update for the July-August period, implies an acceleration in like-for-like sales growth for September and October to about three per cent. Another important finding is that all of Super Retail Group’s business divisions recorded positive growth in like-for-like sales with the exception of MacPac.
Super Retail Group has about $250 million of franking credits, so a special dividend or other ‘capital management’ at the end of the first half is a distinct possibility if sales remain robust.
Compared to 2019, Super Retail Group has grown sustainably, has more net cash, and as we have reported previously, analysts now see the DIY Automotive business (SuperCheap Auto) as ‘defensive’ during times of cost-of-living pressures. Perhaps more importantly for the price earnings (P/E) of the stock (which measures popularity), the company is emerging as a far less cyclical business than previously regarded.
The Montgomery Small Companies Fund own shares in Super Retail Group. The Montgomery Fund and the Montgomery [Private] Fund owns shares in Woolworths. This blog was prepared 30 October 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 Super Retail Group and Woolworths, you should seek financial advice.