Youth wallets tighten, but these younger consumers are still more optimistic than most shoppers
A UBS deep dive into younger shoppers reveals a cohort spending less than the average Australian, but who are more optimistic about their financial future. Plus, the stocks that will do best.
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Younger Australians are more optimistic about their income, savings and wealth expectations compared to older age brackets, but they have traded down their spending on sneakers and travel for cheaper items like snacking on burritos and fried chicken.
Still, those in their teens and mid-20s are expecting to spend more on music, arts and gambling than respondents in their mid-20s to 30s, a UBS survey of consumer intentions has found.
While select younger people might get help from the ‘bank of mum and dad’ for living expenses and housing, they are as a cohort following the lead of the rest of the economy in adapting to the habits enforced by the cost-of-living crisis.
This has compelled 18 to 34 year olds to trade down within categories such as fast food or fashion. And investors should take notice; the nation’s 7 million youth consumers make up around 27 per cent of the population.
In fast food for example, Mexican-themed restaurant Guzman y Gomez is booking rising patronage but Domino’s Pizza, Hungry Jacks and KFC are tracking weaker.
UBS thinks this supports its opinion that shares in GYG have 16.4 per cent upside to the current price. The broker still has a ‘buy’ recommendation on local KFC owner Collins Foods. A deep dive into stocks exposed to younger shoppers, and the best operators in their category, has led UBS to slap ‘buy’ recommendations on fashion chain Universal Store, footwear retailer Accent Group, Solomon Lew’s Premier Investments (which owns kids stationery chain Smiggle and sleepwear brand Peter Alexander) and Collins Foods, the owner of more than 250 KFC stores.
The UBS Evidence Lab survey of 1,000 Australian adults polled between mid-May and early June found that younger consumers remained more optimistic financially over the next 12 months compared to all consumers.
For these shoppers, aged 18-34, cost-of-living pressures have moderated slightly quarter on quarter, yet are still mixed versus the average Australian consumer. Spending intentions were lower quarter on quarter, as well as year on year, and are now marginally below the average consumer, driven by lower income and wealth expectations.
“Youth consumers’ income, savings and wealth expectations all moderated substantially and at a faster rate versus the average consumer, yet still remain positive and above the average consumer,” concluded analyst Shaun Cousins.
The feeling of optimism, despite tougher financial conditions, could be simply a function of hopefulness.
Cost-of-living pressures were most intense for younger people in budget areas such as fuel, rent and interest rates but lower in food and utilities, the UBS survey reported.
Home improvement, clothing and footwear, domestic travel and food takeaway categories declined the most, based on measured spending intentions by category, both quarterly and annually.
For the investor looking to get exposure to the best retailers catering to the demands of 18 to 34 year olds, UBS is tipping retailers that are soaking up market share.
“We prefer strong operators / market share gainers exposed to the youth consumer in their categories of importance,” citing Accent, Collins Foods, Premier and Universal Store.
UBS believes there is as much as 38.6 per cent upside to Universal Store’s share price, 39.5 per cent upside to Accent’s share price - almost one quarter of its stores are in youth-focused shoe banners - and 28.5 per cent upside to the Collins Foods share price.
UBS is ‘neutral’ on Guzman y Gomez but still sees 16.4 per cent upside to its valuation with 60.7 per cent of sales to the 18-34 year old demographic who are in turn 41.4 per cent of all turnover in the fast-food sector.
Accent, which is the nation’s largest footwear retailer with banners like Hype, Glue and Platypus, is not impervious to a downturn. Accent recently issued a profit warning that put a dent in its share price, but this gloomier scenario was now ‘built in’ to the stock, Mr Cousins told The Australian.
“They’ve seen this slowdown in this spending, and the rationale for our retention of our ‘buy’ rating in that instance has been very much around we think a lot of that is in the price. And we look at a company like Universal Store as someone that is a very good operator in that youth apparel space and we are confident that they can perform possibly in spite of what looks more challenging survey responses in this survey relative to what we’ve had in prior surveys.”
A UBS poll published this time last year found a larger proportion of household budgets are being eaten by “pain” categories such as utilities, rent and insurance and eroding discretionary spending.
Originally published as Youth wallets tighten, but these younger consumers are still more optimistic than most shoppers
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