Investing Today: 3 Drivers that move the needle for consumer discretionary stocks on ASX

  • Jul 07, 2020 AEST
  • Team Kalkine
Investing Today: 3 Drivers that move the needle for consumer discretionary stocks on ASX

Summary

  • Consumer discretionary sector is among the industries that are hardest hit by the COVID 19, leading to further changes in the business models, including store footprint and digital capabilities.
  • The sector continues to have several headwinds on its wide range of sub-industries, including unemployment, wage growth, travel restrictions, lower propensity for discretionary spending.
  • As a cyclical sector, it remains well positioned to capture the revival in economic activity and household demand in the country. The accelerated shift to digital channel also means additional growth opportunities for the businesses.

Consumer discretionary stocks of S&P/ASX 200 have recovered since March lows. These businesses were also at the heart of COVID 19 led adjustments in consumer behaviour, foot traffic, store operations, rising unemployment, welfare support as well as accelerated digital needs.

It also includes some of the severely impacted businesses due to lockdowns, including travel, hotels, leisure. Moreover, these stocks continue to remain volatile – given that further outbreaks in Melbourne are causing borders closures.

Complications associated with international travel have led to further spikes in new infections in some countries now, including Australia. In addition to this, people have started to socialise as re-opening continues.

Apparel retailing, homeware, furniture, automobiles, food services also constitute as a part of consumer discretionary sector. Despite shifts in fundamentals, investors continue to prefer large and successful businesses. But growth stocks like e-commerce have seen valuations soaring.

Funding needs of firms are likely to remain resilient as investment decisions will factor the structural changes, altered trading conditions, and long term vision of the business. It is an appropriate time for cash-rich, high-quality businesses to consider inorganic growth options.

Although the sector has high exposure to COVID 19, the revival in economic activity will likely see quality companies making the best out of opportunities.

Pro cyclical: Consumer discretionary sector is an economically sensitive sector, and an economic recovery will likely mean tailwinds for the industries. Markets as well as consumer discretionary sector have recovered from the lows. Income growth and unemployment rate – the two main fundamental drivers for the sector point to a weaker outlook over the near term.

Interest rate sensitivity: Discretionary spending continues to be sensitive to interest rates and lending rates in the markets. Some of the businesses in the consumer discretionary sector tend to have a better outlook when the housing market is picking up given that households are likely to make new discretionary purchases in a new home.

Digital push: Discretionary retail companies have seen an increase in the digital take-up by their customers, and companies with existing omnichannel retail experience have capitalised on the arising opportunities. Online sales share will likely increase over the medium term as underpenetrated categories catch-up, and businesses with relatively lower online sales margins now have to stress on strategies to improve those margins.

Related: Amazon to build a robot warehouse in western Sydney

3 consumer discretionary stocks on ASX

City Chic Collective (ASX:CCX)

City Chic has recently cleared the air on the speculation of acquisition and capital raising plans. It was said that the company is committed to grow international plus-size segment as well as global footprint.

It has been evaluating opportunities for potential acquisition globally, but no agreement has been reached related to the potential deals. When in need of acquisition funding, the Board would consider funding options, including capital raising, cash or debt.

Earlier last month, CCX negotiated rental terms with its landlords and agreed for lower rents during the lockdowns when stores were not operating. It also decided to close 14 stores where it failed to negotiate terms with landlords.

On 7 July 2020, CCX last traded at $3.110, up by 1.6% from the previous close (AEST: 1:19 PM).

Harvey Norman Holdings Limited (ASX:HVN)

In June, the company published the unaudited accounts for the 11 months ended 31 May 2020, The company reported profit before tax and non-controlling interest. There was an increase of around 20% over the same period last year when excluding net impact of AASB 16 and property revaluation adjustments.

After cancelling interim dividend, it also resolved to declare a fully-franked special dividend of 6 cents, which was paid in June. In the second half to 31 May, total sales of Australian franchisees increased 17.5%, and aggregate sales in AUD terms increased 3.55%, led by favourable FX movement in some currencies.

Source: HVN Announcement

Source: HVN Announcement

NZ stores started trading again on 14 May 2020 after the lockdown. From mid-April, the company started a staged re-opening of its stores in Malaysia. Ireland and Northern Ireland stores started trading in early June and mid-May.

Stores in Slovenia and Croatia re-opened in April, and Singapore stores were expected to open in late June. In most of its markets, the company was trading online during the store closure periods.

On 7 July 2020, HVN last traded at $3.66, up by 0.83% from the previous close (AEST: 1:19 PM).

JB Hi-Fi Limited (ASX:JBH)

JB Hi-Fi has seen strong growth in sales in the second half in Australia as consumers rushed for stay-at-home consumers appliances. In NZ sales growth in the second-half was impacted by store closures, but initial trading was strong after re-opening.

Sales growth and cost control have ensured to offset the impact of investments in additional operating costs associated with COVID 19 safety measures for consumers and team members. Subject to audit review, JBH estimated a non-cash impairment of $25 million to its NZ businesses related to review of carrying value of assets.

Source: JBH Announcement

Source: JBH Announcement

In FY20, the company is expecting total sales of around $7.86 billion  and NPAT in the range of $300 million and $305 million after non-cash impairment to NZ business.

On 7 July 2020, JBH last traded at $43.700, up by 1.42% from the previous close.

 


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