Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Thematic (Sector/Industry)

Australia Retailing / Thematic (Sector/Industry)

<ul class=""><li>Stay underweight bricks and mortar retail. Our model portfolio is underweight retail, despite the sector having attractive valuations.  We argued that Value driven outperformance by this sector is unlikely, given the structural pressures preventing a sustainable earnings turnaround.  Last week’s <a href="https://www.smartkarma.com/entities/577" target="_blank" data-smartkarma-citation="entities:577:1">Myer Holdings Ltd (MYR AU)</a> downgrade was a timely reminder that these structural pressures are not abating.  The company announced that sales in the first 2 weeks of December were 5% lower than the same 2-week period last year.  This announcement came only a couple of weeks (24 November) after its Annual General Meeting when it reaffirmed guidance for FY18.  The company also said that “Despite investing heavily in marketing and traffic-driving initiatives, total sales to the end of November were down 2.3% and down 1.8% on a comparable store sales basis. </li></ul><ul><li>Is the <a href="https://www.smartkarma.com/entities/577" target="_blank" data-smartkarma-citation="entities:577:1">Myer Holdings Ltd (MYR AU)</a> downgrade a symptom of an industry-wide problem? The <a href="https://www.smartkarma.com/entities/577" target="_blank" data-smartkarma-citation="entities:577:1">Myer Holdings Ltd (MYR AU)</a> downgrade could be signalling that the key Christmas retail trade period is going to be disastrous across most categories.  However, it may also be signalling a problem merely with the company or even the department store category.  The downgrade also comes after other bad news for the sector, including the launch of Amazon and a series of weak economic reports.  The 0.5% rebound in October retail trade was welcome, but it follows a 4-month period where monthly growth averaged -0.1%.  Similarly, the 3.6% rise in Consumer confidence reported in December was also positive because the index is now above 100pts and at its highest level since December 2013.  But the index has only been above 100pts twice in the past year, which is not long enough to sustain a consumer recovery.</li></ul><ul class=""><li>Banks' currency purchases suggest retail is in trouble. We use high-frequency weekly data published by the RBA on its own balance sheet to assess the buildup in spending during the key pre-Christmas trading period and compare it to the same period in previous years.  Demand for currency by the Banks from the RBA is tracking weaker than each of the past 4 years after adjusting for credit card purchases only 1 week from Christmas.  Our analysis suggests that retail trade will probably rise only 2.2% for the November- December period vs the same period last year.  This would be the weakest growth since 2010 and raises concerns about <a href="https://www.smartkarma.com/entities/555" target="_blank" data-smartkarma-citation="entities:555:1">JB Hi-Fi Ltd (JBH AU)</a>, <a href="https://www.smartkarma.com/entities/6373" target="_blank" data-smartkarma-citation="entities:6373:1">Super Retail Group Ltd (SUL AU)</a>, <a href="https://www.smartkarma.com/entities/645" target="_blank" data-smartkarma-citation="entities:645:1">Harvey Norman Holdings Ltd (HVN AU)</a>, and <a href="https://www.smartkarma.com/entities/1104" target="_blank" data-smartkarma-citation="entities:1104:1">Wesfarmers Ltd (WES AU)</a> and <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a> discretionary retail businesses. </li></ul><ul><li>Profitability looks vulnerable to excessive imports. Weak sales growth is our key concern, but this is compounded by the high level of imports ready to be delivered to the stores.  Inventories in-store don’t seem excessive and are around the levels of the past few years heading into Christmas.  However, goods at the port are very high and will create excess inventory once they are delivered.</li></ul>

Stay underweight bricks and mortar retail. Our model portfolio is underweight retail, despite the sector having attractive valuations.  We argued that Value driven outperformance by this sector is unlikely, given the structural pressures preventing a sustainable earnings turnaround.  Last week’s Myer Holdings Ltd (MYR AU) downgrade was a timely reminder that these structural pressures are not abating.  The company announced that sales in the first 2 weeks of December were 5% lower than the same 2-week period last year.  This announcement came only a couple of weeks (24 November) after its Annual General Meeting when it reaffirmed guidance for FY18.  The company also said that “Despite investing heavily in marketing and traffic-driving initiatives, total sales to the end of November were down 2.3% and down 1.8% on a comparable store sales basis. Is the Myer Holdings Ltd (MYR AU) downgrade a symptom of an industry-wide problem? The Myer Holdings Ltd (MYR AU) downgrade could be signalling that the key Christmas retail trade period is going to be disastrous across most categories.  However, it may also be signalling a problem merely with the company or even the department store category.  The downgrade also comes after other bad news for the sector, including the launch of Amazon and a series of weak economic reports.  The 0.5% rebound in October retail trade was welcome, but it follows a 4-month period where monthly growth averaged -0.1%.  Similarly, the 3.6% rise in Consumer confidence reported in December was also positive because the index is now above 100pts and at its highest level since December 2013.  But the index has only been above 100pts twice in the past year, which is not long enough to sustain a consumer recovery.Banks' currency purchases suggest retail is in trouble. We use high-frequency weekly data published by the RBA on its own balance sheet to assess the buildup in spending during the key pre-Christmas trading period and compare it to the same period in previous years.  Demand for currency by the Banks from the RBA is tracking weaker than each of the past 4 years after adjusting for credit card purchases only 1 week from Christmas.  Our analysis suggests that retail trade will probably rise only 2.2% for the November- December period vs the same period last year.  This would be the weakest growth since 2010 and raises concerns about JB Hi-Fi Ltd (JBH AU), Super Retail Group Ltd (SUL AU), Harvey Norman Holdings Ltd (HVN AU), and Wesfarmers Ltd (WES AU) and Woolworths Ltd (WOW AU) discretionary retail businesses. Profitability looks vulnerable to excessive imports. Weak sales growth is our key concern, but this is compounded by the high level of imports ready to be delivered to the stores.  Inventories in-store don’t seem excessive and are around the levels of the past few years heading into Christmas.  However, goods at the port are very high and will create excess inventory once they are delivered.

A Lame-Duck Christmas Retail Period in Oz