The retail winners from spending boost

Income tax cuts and boost to welfare should improve household disposable income in the face of the economic crunch, analysts say.

Chadstone shopping centre is almost deserted on Melbourne’s Covid shutdown. Picture: David Geraghty

Retailers from supermarkets to consumer electronics stores will be holding their hands out for some of the $15bn in spending power handed to Australian households from the federal budget

Discretionary retailers such as JB Hi-Fi and Harvey Norman as well as leading supermarket chains Woolworths and Coles stand to win from an initial estimated 1.2 per cent lift in household spending via the mix of tax cuts, investment allowances and job subsidies.

A report to clients by Macquarie Wealth Management said $12.5bn of income tax cuts and $2.6bn of welfare boost in the budget should improve household disposable income by approximately 1.2 per cent.

It noted that instant asset write-off for businesses could see business invest in new equipment boosting equipment retailers like Wesfarmers (owner of Bunnings and Officeworks) and to a lesser extent JB Hi-Fi and Harvey Norman. Restricted spending on services and travel are likely to continue to drive consumer durable sales for the remainder of 2020.

“This was an unprecedented budget designed to stabilise the economy against a generational challenge of a global pandemic. We think boosting household disposable income by approximately 1.2 per cent should benefit discretionary retailers and we remain ‘outperform’ JB Hi-Fi and Harvey Norman.

“We also see a continued trend towards substitution effect supporting consumer durable spend over services and travel. We also continue to like the large staples of Woolworths and Coles which are both delivering strong top line momentum with valuations that have recently pulled back from highs.”

The Australian Retailers Association welcomed the business support and consumer stimulus measures delivered in the 2020-21 Federal Budget and said the investment will provide a crucial turning point for business and consumer confidence as we build towards a recovery.

“There can’t be an economic recovery without a retail recovery,” said ARA chief Paul Zahra. “The ARA has been calling for measures which encourage consumer spending and provide cash flow relief to business during this financially challenging time.

“We are pleased to see some gains across all of these areas - with highlights being the personal income tax reductions and some modest cash stimulus for welfare recipients which will boost immediate spending power, as well as the loss carry-back scheme and the wage subsidies which will both help keep more money in the bank for struggling retailers in the coming year.”

However, Citi analyst Craig Woolford has taken a slightly different approach to the possible impact on consumer spending next year as the current budget measures wind down, arguing there will be a significant step-down in the total stimulus provided to households in calendar 2021 compared with 2020.

As a result, he remain cautious on discretionary retailers, particularly those with elevated price to earnings ratios.

“The personal income tax cuts and additional pensioner payments may provide $3-4bn a quarter extra to household income, but this pales in comparison to the $60-70bn a quarter paid in June and September 2020 in order to manage through COVID-19. Lapping this level of stimulus keeps us cautious on the retail sales outlook next year.”

But Mr Woolford sees the supermarkets as best positioned to win from the economic stimulus.

“We see the supermarkets as best positioned, with some benefit to retail demand and a more meaningful potential saving from the newly announced JobMaker program. We also note that Super Retail Group is likely a beneficiary from better operating cash flow.

“We continue to see a challenging outlook for retail in the June and September 2021 quarters as the consumer laps the very large stimulus. Accelerated tax cuts and pensioner payments are the most meaningful but were well flagged and relatively small, particularly compared to the COVID-19 stimulus in the June and September 2020 quarters.”

Mr Woolford said the degree of retail sales decline in 2021 should be a function of two offsetting factors: the normalisation of the savings rate, and the normalisation of spending back towards non-retail categories.