How is the NZ consumer discretionary sector faring amidst Covid-19 Headwinds- CAV, CGF

  • Apr 04, 2020 NZDT
  • Team Kalkine
How is the NZ consumer discretionary sector faring amidst Covid-19 Headwinds- CAV, CGF

At the backdrop of the Coronavirus outbreak, economists across the world are anticipating falling consumer demand and disrupted supply chains to trigger a global economic recession. While the impacts are more intense in Italy, broader Europe, Australia and New Zealand are also bearing the consequences of the strict lockdown, with US now being the new epicentre of pandemic.

In New Zealand, the Prime Minister announced a national emergency on 25 March 2020 to control the expanding number of coronavirus cases. 

 As a result, all museums, restaurants, cafes, gyms, cinemas, pools, bars, playgrounds and non-essential services where the public could assemble have been closed ever since.

Consumer Discretionary sector of an economy offers those goods and services that have a "non-essential" ranking in the budget of consumers and yet are highly desired by those who have the sufficient income to splurge on the same. These may inlcude new cars or even luxury cars, premium apparel brands, entertainment sources such as movies and theme parks, home improvements as well as expensive vacations. 

Although, basic services such as supermarkets, doctors, pharmacies, service stations, banking are open, yet consumers are not really focussed on hoarding on any non-essential items at this point of sensitive phase to avoid the spread of the virus.

The evidence of the effect of limited to no economic activity can be seen in the stock markets as major indices continue to give up gains as Covid-19 cases soar, while measures to contain the spread of the virus also lowers forecast around economic activity in the next few months.

Thus, market participants are predicting that the near future is full of uncertainties and there could be persistent sharp declines in Consumer discretionary spending on dining out, travel, automobiles etc.

While stores are closing with no clue about when things will get to normal, it may be possible that e-commerce consumer discretionary companies may have a better chance of bouncing back when things get to normal as people will continue shopping online as opposed to going to a store.

In the months to come, a shift in shopping preferences is anticipated whereby the Consumers will opt for shopping online for necessities inlcuding groceries as well as pet supplies in the long-term. However, small enterprises and travel companies’ recovery graph bears uncertainties.

Nevertheless, it cannot be denied that consumer discretionary stocks are cyclical in nature that is, they thrive when the economy is healthy, unemployment is falling, and wages are high.

Let’s look at how the related companies listed on the New Zealand Stock Exchange (NZE) are faring during the uncertain times.

Cavalier Corporation Limited (NZX: CAV)

Cavalier Corporation operates as a leading manufacturer of high-quality carpet and flooring in New Zealand and Australia via three key heritage brands, including the exclusive Cavalier Bremworth, Bremworth Collection, and Norman Ellison.

Covid-19 Measures Update: The Company recently announced that its business continuity plan amidst Covid-19 outbreak is now in place and further actions are also being taken to safeguard the future of business and jobs for employees.

In line with the Government imposed lockdown, all New Zealand facilities have been shut and only the essential staff required for business are working, that too remotely. The Company is continuously monitoring the situation and supporting access to Government subsidies and assistance for employees, wherever possible.

The Company website is still accepting orders, but delivery would be executed post-lockdown. The Company is actively engaged with its banking partner to continue to ensure liquidity at this point and upcoming months.

Furthermore, the Company is not well equipped or certain to provide any earnings guidance for financial year 2020 (FY20). However, the Board continues to monitor the situation and will inform the shareholders of any market update.

FY20 Half Year Results: Even though the current climate is quite pressing, the Company has had a successful first half of FY20 whereby it delivered revenue of $ 64.4 million, more than its prescribed November 2019 guidance and a Net Loss After Tax (NLAT) of $ 1.2 million.

The normalised EBITDA, excluding transformation costs, was posted at $ 3.0 million and normalised NLAT was around $ 0.6 million. The trading conditions at the start of the calendar year 2020 were soft for carpet, impacting on sales. However, a softer demand for wool did impact Elco Direct’s revenue while the margin showed improvement.

The development of Cavalier’s transformation strategy was only being finalised at that time as the company has planned to position itself as a wool-focused, design-led business and capture customer demand for high-quality sustainable products.

Stock Information: Cavalier Corporation has a market capitalisation of around $ 12.16 million. The CAV stock settled the day’s trade on 3 April 2020 at ~ $ 0.18.

Cooks Global Foods Limited (NZX: CGF)

New Zealand-based Cooks Global Foods operates as an integrated food and beverage retail and supply group which owns the intellectual property and master franchising rights to Esquires Coffee Houses in different countries worldwide. In addition, the Group also holds owns many retail and wholesale companies in associated industries.

Covid-19 Trading Update: Like all other market participants, Cooks Global Foods Limited has been keeping an eye on the ball amid COVID-19 situation, especially concerned about its highest revenue generating business segments being Esquires café stores across the United Kingdom and Ireland.

Although the Irish Government closed different hospitality establishments for two weeks to contain the spread of COVID-19, the cafes have so far been excluded from the instructions. However, presently around 12 franchised cafes are voluntarily closed in Ireland.

In the United Kingdom, the Company’s 40 franchised & 4 company operated stores also remain open, while there has been a 14% reduction in same store sales compared to the same week last year.

Uncertainty still remains as to how long this trading environment would continue and the Company will provide a market update whenever necessary.

Stock Information: CGF’s market cap stands at around $ 22.03 million and the stock last traded at $ 0.045 on 3 April 2020.

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