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 MARKET REPORTS |
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Analyst report - shares
Retail in a tailspin?
August 26, 2007
Brendon Lau, ShareAnalysis
Consumer confidence has weathered the drought and a number of interest rate hikes well, but the severe bout of volatility on our sharemarket coupled with the uncertainty of the upcoming Federal elections and the prospect of another near-term rate hike could be the proverbial straw that breaks the back of retailers. In this current market, is it a good time to be shopping for retail stocks?
To some, the answer could be clouded by souring investor sentiment towards US retailers. The world's largest retailer, Wal-Mart, reported a good earnings result that was overshadowed by its weak outlook. Home Depot sounded just as pessimistic when it delivered its results.
Some economists are predicting that consumer spending in the US is about to fall much harder than originally thought due to crumbling housing prices and more stock market weakness. This spending squeeze is bad news, as consumer spending fuels two thirds of the world's largest economy. Could the same thing happen here?
It is possible, but not very probable. The US sub-prime mortgage meltdown may drive up the cost of borrowing worldwide, but it is unlikely to trigger a housing slump of a similar magnitude here. Furthermore, our fundamental outlook for the Australian sharemarket is still generally positive despite the global credit market turmoil, and we expect equities to come back in favour as corporate profitability is likely to continue growing in FY08, albeit at a slower pace than that in previous years.
The US retail landscape may also not be in as bad a shape as some fear. Non-cyclical teen retailers American Eagle Outfitters and Pacific Sunwear surprised with poor sales that were more likely the result of flawed business execution, as the teen market is not generally sensitive to economic downturns. Better than expected result from rival Zumiez seems to support this view. Billabong (BBG) supplies to both Pacific Sunwear and Zumiez.
Back in Australia, recent surveys on consumer and business confidence are still showing resilience despite the headwinds described above, thanks to record low unemployment and persistently strong demand for our resources. China's industrial production jumped 18% in July from the previous month, and US manufacturing data remain generally solid.
These conditions have and will likely continue to create a good trading environment for Australian retailers. Strong demand for big-ticket items, gadgets and apparel has bolstered the fortunes of JB Hi-Fi (JBH) and David Jones (DJS). Meanwhile, several retailers are planning to open new outlets to capitalise on buoyant consumer spending.
We also note that the short-term risk to consumer confidence may be to the downside if the volatility on our stock market persists and if interest rates continue to rise within a fairly tight time frame. Nonetheless, we remain cautiously optimistic on the retail sector, with a handful of buy recommendations.
More articles from this week's CompareShares newsletter:
Markets: Trouble in China has investors guessing
Self-managed super: Old strategies are now even better
Sustainable investing: Climate change and consumers: hot air or real deal?
Fundamental analysis: Chief ratios for stock hunters - part 2
Resident Trader: Trading CFDs in a gapping market
Smart Investing: Experience tunes in to the market blues
Analyst report: Retail in a tailspin?
US markets: Long valuation waves and market fear
Sub-prime: Sub-prime what?
Ask the expert: Uncovering the average forex trader
Stock of the week: Mincor shares suffer from nickel freefall
CFDs: Pyramiding provides windfall to CFD traders
CompareShares Reader: Cloud gazing or tea leaves?
Brendon Lau is the Editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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