UBS has downgraded its earnings forecast for several of Australia’s largest retail stocks, amid concerns about continually ailing consumer fundamentals, rising utility costs and a softer housing market.
Myer’s share price fell more than two per cent to 0.84 cents in early Friday trading after UBS cut its FY18 earnings-per-share (EPS) forecast for the department store by 17 per cent, moving its recommendation from neutral to sell.
Forecasts have also been cut for Super Retail group (one per cent), Harvey Norman (two per cent), Premier Investments (one per cent), Bapcor (six per cent) and Greencross (six per cent) for FY17.
“There is a growing risk to sector earnings into FY18e, further exacerbated by new competition, rising costs (wages, utilities) and the need to invest in supply chain ahead of Amazon’s entry,” UBS analyst Ben Gilbert said.
UBS reckons retailers with few points of difference, higher cost bases and exposure to competition are most at risk, but left targets for JB-HiFi, Woolworths and Wesfarmers unchanged.
As Gilbert has previously flagged, he sees an upside for Woolies on continued momentum from its turnaround, whereas international expansion is set to bolster the likes of Domino’s and Premier.
JB and Harvey Norman will also benefit from internal efficiency programs as a moderation in housing takes hold, UBS believes.
The Reject Shop, alongside Myer, will suffer from slowing consumer spending and a high fixed cost base, while Flight Centre has been downgraded from a buy recommendation to neutral on “mounting macro headwinds”.
But Myer has been given the largest downgrade, with EPS forecasts cut across FY19-20 by 23-24 per cent.
UBS noted that Myer has lost share in the overall fashion market for ten consecutive quarters, and is most leveraged to weaker consumer spending moving forward.
“Turbulent” consumer outlook
UBS expects retail sales growth to slow to 3 per cent year-on-year in FY17, with discretionary retail slowing to 1.4 per cent on rising living costs from higher utility prices and rebounding petrol prices.
It also flagged out-of-cycle interest rate hikes and a softening housing market as key concerns, saying that there’s no longer a basis to believe housing will provide a tailwind to retail in FY18.
The assessment comes after Reserve Bank of Australia Governor Phillip Lowe flagged low wage growth as a key concern for the economy, calling on workers to demand wage rises last week.
UBS expects household cash flow growth to moderate as the softening effect of housing and falling petrol costs on persistently low wage growth diminishes in FY18.
Market speculation about the severity of a prospective down-turn in housing has been ongoing for several weeks, with predictions ranging from severe to moderate.
CBA chief economist Craig James has told Inside Retail that he expects housing to moderate, but doesn’t think there’s reason to believe retailers like Harvey Norman and JB Hi-Fi will be adversely effected.
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