Retailers’ wings clipped as analysts downgrade star performers

Super Retail Group and jewellery chain Lovisa’s star turns may have come to an end with analysts downgrading the stocks after re-evaluating their prospects. Here’s why.

A team member of Super Retail Group's Supercheap Auto chain. Picture - Supplied

Lovisa was the worst ASX 200 performer in a sea of red on Tuesday as the jeweller and fellow retailer Super Retail Group were hit by analyst downgrades after their recent share price rallies.

The two retailers were both targeted for being fully valued after a strong share price run, and were among several stock downgrades across the market as the benchmark ASX 200 Index dropped by 1.1 per cent.

Lovisa dropped 5.2 per cent to $22.72 after UBS downgraded the jewellery chain to a neutral rating given a strong rally in its share price over the last six months and a slowing in new store growth.

“Given strong recent share price performance as well as downside risk to consensus (UBS estimates below market), we believe the risk reward is no longer compelling,” UBS analyst Shaun Cousins said.

The research report noted Lovisa’s share price had risen 21.8 per cent since July 3, compared to the ASX 200’s 3.5 per cent gain.

Mr Cousins said Lovisa still had significant store growth potential as it transitioned to a global fashion brand, but a slowing in net new store growth removed a key revenue driver.

“Store growth is assisted by a consistent format across markets while leveraging a low ticket price and socialisation by a predominantly youth (16-35) consumer.

“Yet despite these advantages, recent data suggests a slowing store growth, which coupled with moderating like-for-like sales growth, reduces revenue estimates.”

Fellow retailer Super Retail Group was hit by downgrades from JPMorgan, Jarden and Morgans, after a mixed first-half performance that pulled in record sales but missed analyst expectations.

Model wearing Lovisa gold bangle stack.

Downgrading the owner of Supercheap Auto, Rebel, BCF and Macpac to a hold, Morgans head of research Alexander Mees said the good news was already in the share price after its trading update.

“Super Retail has been a key pick of ours for a while but, after a strong run, we think it’s now appropriately valued and we downgrade to hold accordingly,” Mr Mees said.

He added that Morgans still believed the business was moving in the right direction and had the right portfolio of brands to succeed.

Jarden analysts led by Ben Gilbert downgraded the stock to underweight, noting the company operated in a cyclical market that was facing rising costs, increased competition and macro uncertainty.

“Whilst the update is positive, it is in the price,” Mr Gilbert said.

“We continue to think management is doing a great job but see the valuation as full, with high expectations at a time sales are moderating, promos are lifting and CODB (cost of doing business) is rising.”

JPMorgan analysts Bryan Raymond and Christina Kim also downgraded Super Retail to underweight.

“Although it is showing relatively resilient sales momentum across auto, sports and leisure divisions, Super Retail Group is facing a challenging outlook with consumer demand expected to contract after a strong Black Friday and Boxing Day promotional period in combination with a step-up in costs due to inflation.

“Considering there is no clear positive catalyst, current levels of elevated multiples is not justified, in our view.”

Super Retail shares retreated from Monday’s record highs, dropping 2.6 per cent to $16.27 on Tuesday.

In contrast, Charter Hall was one of the stronger ASX 200 performers after Morgan Stanley analysts suggested investors should be more positive on the property funds group with macro conditions stabilising. Its shares rose 2.2 per cent to $11.85.

Upgrading Charter Hall to an overweight rating, Morgan Stanley said the risks around the interest rate-sensitive stock were now more balanced compared to a year ago.

“As rates stabilise (e.g. the long end of the curve - being the 10-year yields), and potentially soften, history suggests CHC is the ideal stock to own under such a macro environment within Australian real estate,” analysts Simon Chan and Lauren Berry said.

“The transactions market, which has driven the bulk of CHC’s AUM (assets under management) growth over the last decade, is likely to pick up after a very soft 2023 - the slowness of which was driven by the pace of rapid uplift in bond yields, rather than the level of bond yields itself.”

Originally published as Retailers’ wings clipped as analysts downgrade star performers