By Grace Lagan
The war in the Middle East may or may not be over, but the country’s retailers should brace themselves to feel the full effect of gloomy shoppers who are facing higher interest rates and steeper grocery bills.
A range of indicators are already showing sentiment souring and wallets closing, and major retailers have been among the biggest losers over the last six weeks as conflict between the United States and Iran has raged.
“It’s probably as bad an environment as we’ve ever seen in terms of consumer sentiment, and that’ll flow through to retail,” said Oscar Oberg, a lead portfolio manager at Wilson Asset Management.
“We’re taking a long-term view across our funds, but we’re fully cognisant that there’s probably going to be as many downgrades as we’ll ever see in the next two to three months, and it’s not just retail, it’s across all stocks.”
One of WAM’s big retail holdings, Premier Investments – a vehicle that runs Peter Alexander and Smiggle and is controlled by billionaire businessman Solomon Lew – has been hit worse than the broader market, with shares down 3.3 per cent since February 28. Another, fast-fashion jewellery chain Lovisa, has seen its share price fall more than 3.4 per cent in that time.
They are not alone. Since the start of the war – during which the Strait of Hormuz was closed and pushed up oil and fuel prices – the S&P/ASX 200’s consumer retail stocks have dropped 1.83 per cent. The ASX 200 has fallen around 2.7 per cent in the six weeks since the end of February.
Despite the slide in retail stocks – Endeavour Group, which operates the BWS and Dan Murphy’s liquor chains, is down more than 16.6 per cent after a disappointing trading update in early March – analysts at Jarden are warning clients that the worst could still be on its way.
“Despite the recent discretionary retail de-rate, we see earnings … risk as the full extent of Reserve Bank hikes and rises in day-to-day costs hit,” wrote the bank’s analyst Ben Gilbert. “Our overall sector preference shifts to staples and health, notably Sigma Healthcare, Woolworths, Coles and Metcash. We see quick service restaurants and liquor as most challenged.”
There has been one bright spot among retail stocks – the major supermarkets. Woolworths and Coles shares are up 3 and 11 per cent respectively since the start of the conflict. The consumer staples index, which covers the supermarkets along with food producers like The a2 Milk Company and Bega Cheese, is up 4.77 per cent since February 28.
“Shoppers are [being] hit by a double whammy of oil and rates,” said Morningstar Australasia director Johannes Faul. “I would say the staples are a lot less exposed than discretionary items to those pressures.”
According to National Australia Bank’s consumer sentiment survey, shoppers are under increasing stress. “Consumers are planning to shift from selective cutbacks in discretionary spending to broad-based restraint that now includes essential items, signalling rising financial stress and reduced spending capacity,” the bank’s economics team wrote of the results.
Data compiled by the bank shows household expectations for their spending on most categories – bar savings, investments and paying off debt – fell in the first quarter, indicating the potential for a widespread pullback in consumption, and in turn, the bottom lines of retail stocks.
While Morningstar’s Faul said an end to the conflict could unwind high oil prices relatively quickly, the “big unknown” remained how much of the higher costs consumers could absorb by drawing down on their savings.
“It’s going to be interesting to see how households react,” he said.
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