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Retailers face another unhappy Christmas

Retailers face another unhappy Christmas

Christmas is shaping up to be sluggish for retailers, weighed down by Australia’s lacklustre economy and poor consumer sentiment, with fund managers and analysts remaining wary of companies exposed to household spending.

Christmas trade would “struggle to be better” than 2013, Morgan Stanley analyst Malcolm Wood said.

“I suspect there were sampling issues that lifted headline retail numbers higher a year ago,” he said. “The headline numbers will look weaker but the reality will be similar I’m guessing.”

In a research note released to clients earlier this week, Mr Wood said he believed “consumer weakness will soon become clearer…pushing retail sales back into a sluggish 2 to 4 per cent year-on-year range”.

“This will then align with well below-average consumer confidence, which is 14 per cent below the election-euphoria levels of late last year.”

The note described Australia consumers as “cautious” with weak consumer fundamentals outside of strong house price growth. These included sluggish employment growth, flat real wage growth, high debt levels and a rising fiscal burden.

This weakness flowed through to stocks in the retail sector, with Wesfarmers the only stock getting Morgan Stanley’s tick of approval.

“This reflects strong momentum in Bunnings and Kmart, and potential for capital management and/or accretive acquisitions,” said the note.

Within media stocks, only Nine Entertainment would “play any recovery in advertising spending,” and Morgan Stanley’s research team preferred high-growth online businesses such as REA, Seek and Carsales over the traditional media names.

It would take interest rate cuts, “more-measured fiscal policy” and a “material decline in global concerns” to lift consumer sentiment.

Mr Wood said lower petrol prices were about the only factor helping to improve consumer sentiment, which he described as “sluggish”.

Notwithstanding JB Hi Fi’s “fairly decent” results released on Thursday, he said the outlook for retailers was “tough”.

JB’s results showed same-store sales this year down 2.1 per cent, but with strong improvement over the last two months. This was enough to send its shares jumping more than 10 per cent.

Chief executive Richard Murray has reiterated forecasts of 3.4 per cent sales growth to $3.6 billion this year. The company is hoping the appetite for new smartphones, tablets and gaming consoles will drive sales through the Christmas period.

Don Williams from Platypus Asset Management agreed that trading this Christmas would better than 2013, but that wasn’t saying much.

“It’s hard to believe it will be worse than last year or the same as last year,” he said. “Every retailer should be up substantially on last year, which was a complete disaster.”

“Retail sales data over the last six months seems pretty consistent around a circa 6 per cent growth rate. That’s more momentum than we had going into Christmas last year, which is obviously good.”

However Mr Willliams said he is staying away from retail stocks.

“We have no traditional retailers in our portfolio at the moment. The industry is just so competitive and you’ve got a lot of off-shore players either looking or with a presence down here. It’s going to be hard for any of the major guys to grow their revenues basically.

“JB came out with a positive set of numbers but their earnings per share growth rate this year is 3 to 5 per cent. It’s not particularly exciting.”

Tim Carleton from Auscap Asset Management said it was too early to judge whether Christmas trading would be good or bad, and that he was awaiting more evidence either way.

“If we get a bounce in consumer sentiment I would expect it to be a reasonably good Christmas but ultimately while you can look at indicators they are not a perfect predictor for what will actually transpire.”


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