Shopping for retail stocks – 3 to watch

13 Comments

1. 

   Sammy
   May 3, 2017 at 4:46 pm:

   Hi Roger,
   I’d be interested in your views on Nick Scali in light of their recent profit guidance announcement.

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     Roger Montgomery
     May 3, 2017 at 5:04 pm:

     The company listed Furniture drivers as 1) Consumer confidence 2) Volume of housing sales 3) Renovations 4) Stable interest rates 5) wealth effect 6) Population growth.

     Here’s our take. Population is a constant. Wealth effect = rising asset prices will slow or reverse. Stable interest rates may not be stable for long. Volume of house sales (AKA housing activity) Commencements are holding up so there’s some life left in sales but medium density +4-story residential approvals have now declined from 80,000 to 60,000 – down 25%. Forgetting our expectations of a residential price correction, there are serious implications for a decline in economic activity from the dual pressures of;

     1) mortgagees holding record levels of debt and facing financial stress from declining rental incomes and higher interest costs, and
     2) the reduced activity from an inevitable end to booming residential construction activity.

     We know that there are strong correlations between housing activity, as measured by housing sales, and Renovation, Addition and Alteration demand. Indeed, the former leads the latter by about 10 months. With sales activity having slumped since the third quarter of 2016, we expect significant declines in demand for the wholesalers and retailers of all products associated with renovating. We also believe the prospect of rate rises from record lows suggests housing activity lead by commencements is unlikely to bounce and could continue to fall through 2018 and 2019, suggesting the slump in demand for alteration and addition –related products could be deep.

     (As an aside Nick Scali also noted the relationship between house sales volume and alteration and addition related demand for furniture. What I thought was a little disingenuous was quoting the IBIS world Feb 2017 Industry report E3011 for House Construction Australia but picked out the quote about demand for additions and demand rising over the next five years without addresing the fact that the current leading indicators have slumped to negative 10% yoy.)

     We also know that dwelling completions and wages growth drive demand for furnishings and household equipment consumption. Slumping growth rates in dwelling completions since 2015 and record low wages growth rates of 1.9% y/y will compound the slowdown in demand for furnishings and household equipment, which has fallen from REAL rates of 6% (three times the rate of growth of other consumption) to 2.5% today and heading to zero.

     Elsewhere we expect consumption generally to be under pressure. If job losses where to accelerate from a decline in construction activity, expect more retailers to face headwinds in addition to those already likely from the confirmed arrival of Amazon in Australia (note Amazon is likley to have only a minor effect on furniture retailers directly).

2. 

   Bill
   May 1, 2017 at 11:15 am:

   The market has crucified RCG!
   Thankyou for your insights Roger

3. 

   Bill
   April 27, 2017 at 4:50 pm:

   Hi Roger
   What do you think about RCG shoe retailer?
   It’s acquired strong retailers Hype dc, platypus to name a few with experienced CEO’s running the merged company..

   • 

     Roger Montgomery
     April 30, 2017 at 8:05 pm:

     Over time good franchises run by superior management can take market share and continue growing but they are beholden to the economic cycle and I am concerned for where we are in Australia’s Bill.

   • 

     Roger Montgomery
     May 1, 2017 at 9:25 am:

     Hi Bill, Further to my earlier reply to you a day or two ago, RCG has now provided the market with an update: here’s the take from one of our brokers….

     “RCG has provided a trading update and has downgraded its FY17 underlying EBITDA guidance. Key points include:

     “Trading update for March & April (together due to timing of school holidays and Easter)
     Group’s sales performance across March/April have fallen short of management’s expectations.
     Accent LFLs of c0% (vs +7.6% in 1H17 and -3.2% for the first 7 weeks of 2H17). This implies that Accent FY17 YTD LFL is +4.2%. Previous guidance of +6% FY LFLs was not reiterated. A slight improvement however we note that Accent was cycling +25% for the first 7 weeks of the pcp.
     Hype LFLs of c0% (vs 0% in 1H17 and -13.2% for the first 7 weeks of 2H17). This implies Hype YTD FY17 LFLs of -2.4%.
     TAF LFLs of c0% (vs 0% in 1H17 and 0% for the first 7 weeks of 2H17).
     RCG Brands LFLs of -5% (vs +1% for 1H17 and -3.2% for the first 7 weeks of 2H17). This implies that RCG Brands FY17 LFLs of -3.5%.
     RCG and Accent Wholesale have “performed below expectation since mid-February”.

     “FY17 guidance downgraded
     Underlying EBITDA now expected to be between A$74-80m (vs previous guidance of A$85-88m). This equates to a 9.1%-12.9% downgrade.
     Management expects trading conditions to continue to improve, however we note that divisional targets were not reiterated/commented on.”

4. 

   David
   April 27, 2017 at 4:20 pm:

   Lovisa? Differentiated offer, high gross margins, low debt, strong cash operational cash flows, international growth opportunity.

5. 

   Rex Roberts
   April 27, 2017 at 3:56 pm:

   Hi Rodger, do you think that VTG is still a retailer worth considering??

   Thanks Rex

6. 

   Peter Vassiliou
   April 27, 2017 at 3:32 pm:

   Thank you I thought so.

7. 

   david klumpp
   April 27, 2017 at 3:06 pm:

   Hello Roger: In these times of nervousness about Australian retailers, it was helpful to read your views on some which have performed in the past and have bright prospects. A retailer which has grown profits at a good rate (consistent high return on equity) while using little or no external sources of capital is Nick Scali. I would be interested in your opinion on it.

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     Roger Montgomery
     April 30, 2017 at 8:05 pm:

     Hi David,

     I’ll post something that will be important to watch for Nick Scali in the next day or two.

8. 

   Peter Vassiliou
   April 27, 2017 at 12:01 pm:

   Disclosure please ?

   • 

     Roger Montgomery
     April 27, 2017 at 3:07 pm:

     Hi Peter, Montgomery owns shares in BWX.