ASX sector wrap: 5 retail stocks for your Christmas stocking

Christmas is one of the big blips on retailers’ radars, who eagerly await the combined effects of shoppers with more time on their hands and the season’s gift-giving tradition.

But ongoing cost-of-living pressures loom as large this year as it did last year when the RBA began to increase interest rates.

The latest 0.25% increase emphasised the job still to be done before inflation pulls back within the central bank’s target range. This week’s commentary from Marion Kohler, RBA’s Assistant Governor (Acting) highlighted the hip-pocket effects of cost-of-living pressures, higher interest rates and higher taxes.

Overall, the latest quarterly inflation figure was 5.4% in September, down from 7.3% in the same period of 2022. But the pace of the decline has slowed, with the RBA pulling back on its projection for when inflation will be within target, which isn’t expected to hit 3% until late 2025.

But even so – perhaps even more because of the persistent economic gloom – Christmas still marks a bright spot for retailers. Montgomery Investment Management’s Roger Montgomery recently noted that Australian retailers’ trading updates were more robust than many expected.

“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,” Montgomery said.
“So far, analysts and economists have been wrong.”

In the following, I take a look at a handful of well-known retailers, what’s been happening in recent months, and how the brokers are viewing them.

Note: This is not financial advice. Please consult a professional and consider your individual circumstances before making any financial decision. 

Five stocks for your stocking

JB Hi-Fi (ASX: JBH)

• Market cap: $5.06 billion
• 12-month return: 7.19%

The consumer electronics retailer reported stronger-than-expected sales figures at its AGM on 26 October, down just -1.4% for the quarter on the strong corresponding period a year earlier.

Commenting after the AGM, Atlas Funds Management’s Hugh Dive suggested JBH could be “benefiting from their lower cost business model, which has seen them take market share off Harvey Norman (ASX: HVN).”

On 27 October, broker CLSA upgraded JBH to BUY from Outperform, with analyst Mark Wade lifting his price target to $53 from $52.

JPMorgan upgraded JBH on 6 September, lifting its rating to OVERWEIGHT from Neutral. Analyst Bryan Raymond increased his price target to $52 from $50.

JB-HiFi shares traded at $46.25 when the market closed on Tuesday 14 November.

Harvey Norman (ASX: HVN)

• Market cap: $4.57 billion
• 12-month return: -10.76%

Following on from his above comment, Hugh Dive also emphasised the contrasting sales results between JBH and HVN, the latter booking a -14% decline for the quarter.

“But [it] announced a surprise $440 million on market buy-back as a salve for investors,” said Dive.

“Atlas’ calculations indicate that the company will be borrowing to buy back their shares, an aggressive move from an already highly geared company in a market with rising interest rates and weakening retail sales.”

On 29 October, UBS upgraded Harvey Norman to NEUTRAL from Sell, analyst Shaun Cousins leaving his price target unchanged at $3.75.

On the same day, Jefferies upgraded the retailer to HOLD from Underperform. But Jefferies analyst Michael Simotas reduced his price target to $3.25 from $3.40.

In the prior month, Morgan Stanley downgraded HVN to UNDERWEIGHT from Equal-Weight, with analyst Melinda Baxter leaving her price target at $3.50.

On 1 September, Citi upgraded HVN to BUY from Neutral, with analyst Adrian Lemme lifting his price target to $4.60 from $3.70.

Harvey Norman shares traded at $3.67 at the market close on Tuesday 14 November.

Premier Investments (ASX: PMV)

• Market cap: $3.85 billion
• 12-month return: -5.09%

Perpetual’s Anthony Aboud singled out the company, the name behind several consumer brands including Smiggle and Peter Alexander, in a recent episode of Livewire’s Buy Hold Sell.

When asked to name a favourite Australian founder-led company, he said companies such as Premier, “go into a downturn with a lot of cash, and they'll deploy that cash and lean into the market when things are getting tough.”

Airlie Funds Management portfolio manager Emma Fisher expressed similar sentiments were expressed in an earlier interview.

"It's got $400 million in net cash, it owns 25% of Myer (ASX: MYR) and 25% of Breville (ASX: BRG), so listed equities, which puts it at over a $1 billion fortress-like balance sheet," Fisher said in early October.

"No matter what happens in the cycle, it's not going anywhere,” she said, pointing out PMV’s 20% share price growth since June.

JPMorgan downgraded Premier Investments to NEUTRAL from Overweight on 6 September, with analyst Bryan Raymond cutting his price target to $25.50 from $26.

Barrenjoey upgraded PMV to OVERWEIGHT from Neutral on 21 August, with analyst Aryan Norozi setting a $28.50 price target, up from $26.30.

PMV shares closed at $24.12 on Tuesday 14 November.

Super Retail Group (ASX: SUL)

• Market cap: $3.05 billion
• 12-month return: 28.61%

Super Retail Group is the owner of well-known brands SuperCheap Auto, Rebel, BCF and Macpac. With a market cap just north of $3 billion, the company is also the 12th largest in the ASX Consumer Discretionary sector.

SUL was one of the retailers Roger Montgomery recently mentioned among those generating a “meaningful high-single-digital percentage of total non-food retail sales” that during their AGM reported accelerating momentum or healthy sales.

“They are now tracking ahead of analysts' estimates, as is gross margin, which looks headed for about 46% for the first half of the financial year 2024 and a good 20 basis points above expectations,” said Montgomery.

From SUL’s update, he also emphasised SUL’s first-half FY24 year-to-date sales were up 2%, implying an acceleration of about 3% in like-for-like sales growth for September and October.

CLSA upgraded Super Retail Group to BUY from Outperform on 26 October, with analyst Mark Wade increasing his price target to $15.25 from $15.

On the same day, JPMorgan cited resilient sales and gross margins in its decision to upgrade SUL to NEUTRAL from Underweight. Analyst Bryan Raymond left his price target unchanged at $13.

Super Retail Group's shares closed at $13.53 on Tuesday 14 November.

Nick Scali (ASX: NCK)

• Market cap: $942 million
• 12-month return: 19.18%

The furniture and homewares retailer delivered a better-than-expected update at its AGM on 19 October. Chief executive Anthony Scali told shareholders that sales conversions were holding up, despite a store traffic decline of between 10% and 15% in the quarter to 30 September.

Scali was featured in a recent episode of Livewire’s Success And More Interesting Stuff, titled Meet the man who turned Nick Scali into a 10-bagger.

Based on current delivery levels, at the AGM, Scali tipped NPAT for the first half of 2024 would be between $40 million and $42 million. This would top market expectations of $38.6 million for the period, the Australian Financial Review reported.

On 22 October, CLSA upgraded Nick Scali to BUY from Outperform, and analyst Mark Wade lifted his price target to $13.50 from $13.

Macquarie upgraded NCK to OUTPERFORM from Neutral on 20 October, the price target increased to $12.60 from $12.20.

Nick Scali shares closed at $11.62 on Tuesday 14 November.