Retail Spending and Stocks That Have Become Dearer

Summary

• June retail turnover normalised after the volatile spending periods induced by COVID 19 restrictions, but now Victoria is expected to have further effects of lockdowns on retail sales.
• CommBank card data insights for July suggested that momentum in clothing, footwear, food and food services continued to gain. Due to lockdowns in Victoria, spending in the state has turned negative.
• For the near-term, underlying consumer fundamentals like employment and wage growth continue to exhibit softness as well as uncertainty.

Retail spending continues to normalise after a dislocation on account of restrictions impacting a broad range of consumer spending. Level 4 restrictions in Victoria are expected to add further volatility in consumer spending, but a resumption in other states is gradually underway.

June Retail Spending Increased 2.7%

After recording almost 17% rise in retail turnover in May, the Australian retail spending increased by 2.7% (seasonally-adjusted) in June compared to the same month last year.

In the June 2020 quarter, retail sales were down significantly compared to the previous quarter for food services, footwear, clothing, and personal accessories. However, there was a strong demand for furniture, electrical goods and hardware categories, as well as for other household goods. Spending in departmental stores was also higher compared to the March quarter.

Retail turnover has been reviving in the lagging segments like food services, footwear, clothing, and personal accessories. All such categories posted strong month over month growth in turnover, largely because of re-openings.

The Australian Bureau of Statistics (ABS) also noted that food retail turnover increased at the end of the month. Also, online sales accounted for 9.7% of the total retail sales in June.

CommBank Card Data Insights

After looking into insights for the past month, it appears that broader recovery in spending was lagging in Victoria already. During early July, the spending pattern was negative in Victoria after restrictions were imposed.

It was also witnessed that segments that were lagging earlier like clothing and footwear kept the momentum. Consumer spending on essential items like food and food services was also better than same period last year.

In the week ended 17 July, it was noted that spending momentum in goods and services had picked up from the previous week. However, there was a weakness in Victoria. The data suggested that consumer spending on goods and services moderated by the end of the month.

During the month, there was strong momentum in food and food services, household furnishing and equipment as well as clothing and footwear. Spending in Victoria was impacted due to lockdowns and restrictions, while Tasmania was outperforming other states.

Consumer Sentiment Drifted Lower

Westpac-Melbourne Institute Index of Consumer Sentiment was down by 6.1% to 87.9 in July from 93.7 in the previous month. It was noted that the survey was collected in the week when lockdown was imposed in Melbourne and before rising infections in NSW.

Consumer sentiments have been impacted by the new outbreaks in the country. In the July survey, the economic expectations for the next 12 months and five years tumbled sharply. This renewed resurgence of virus means a slower and uncertain path for the foreign education, tourism and hospitality sectors.

The index indicated that sentiment to buy a major household item declined by 2.1% month-on-month with a larger fall in Victoria compared to other states. The survey highlighted that it reflects pressure on family finances, restrictions, health concerns and risks of job loss.

The survey’s unemployment expectations index increased by 12.1%, as job loss concerns rose sharply, and gains of previous months were erased. Given the lockdowns and slower re-openings, the picture for jobs over the medium term was weak as per respondents.

Near-Term Fundamentals Remain Weak and Uncertain

As virus infections continue to evolve rapidly, it is making the economic environment uncertain for the near term. With the introduction of Level 4 restrictions in Victoria, there would be an impact on the output and employment.

Melbourne, a large metropolitan region of the country, contributes significantly to the Australian economy. Given the rising infections and hard lockdowns, economic activities and employment opportunities would take a toll.

Among the major fundamentals for consumer spending – unemployment and wage growth – have been deteriorated in the wake of pandemic, and the near-term outlook also remains bleak. Most of the agencies are predicting that unemployment would hit around 10% by the end of 2020.

Economists are also of a view that it may take years for the country to return back to pre-COVID unemployment levels. Wage growth would be impacted since employers would be unwilling to hire due to the lack of demand.

Good Read: Second Page of the COVID-19 Diary: Business Insolvencies, Unemployment, Underemployment

Retail stocks that are shining bright

But some retail companies have found more superior footing in the wake of this crisis, and some large businesses have depicted the resilience. Retail sector companies with large falls in turnover during the COVID 19 period were also eligible for government support payments.

Super Retail Group Limited (ASX:SUL)

Recently, the company confirmed that trading performance was resilient, and business was quick to adopt the changes in consumer behaviour. Management noted that there was a high demand for fitness and related products.

Since Australians could not visit other countries, they spent time on their vehicles and SUL’s auto business also recorded decent results. SUL has announced that full-year revenue was slightly higher at $2.8 billion compared to $2.71 billion in the previous year.

Although the company has guided for a flat pro-forma net profit after tax between $153 million and $154 million against the previous year, the result was cheered by markets since it is better than market expectations.

On 7 August 2020, SUL last traded at $ 9.2, up by 1.77% from the previous close.

Nick Scali Limited (ASX:NCK)

Recently, the company reported full-year results and gave a surprise to markets. With better than expected profits and strong visibility for 1HFY21, the stock gained wide attraction from investors after the release of results.

The company also expects to deliver 50-60% growth in profits for the half-year ending December 2020, driven by visibility on sales orders. NCK also launched its online website and services, which gained strong customer attraction.

Nick Scali was benefitted with Government support that gave provision for wages of workers during the lockdown period. While Nick Scali posted good results, there would be more flow of information by other furniture and homeware businesses that have recorded strong demand.

On 7 August 2020, NCK last traded at $8.670, down by 1.477% from the previous close.

(All currencies in AUD unless or otherwise stated)