UBS cuts forecasts for retail stocks as cost of living crisis hits

Weakening sales for big-ticket items is the canary in the coal mine for a broader slowdown, with share price downgrades across eight major retailers.

UBS has cut its share price forecasts for a slew of ASX-listed retail stocks as the cost-of-living crisis hits “middle Australia” in a big way, raising the prospect of a “significant slowdown’’ in the ­sector.

The broker has warned that the bulwarks of income growth and strong household savings are starting to be eroded, and a weakening in sales for big-ticket items is the canary in the coal mine for a broader slowdown.

The prediction has prompted a suite of downgrades from UBS for the earnings potential of listed companies, while shares in Harvey Norman, JB Hi-FI, Lovisa, Super Retail, Accent, Premier Investments, Universal Store and Domino’s are all now forecast to be trading lower in a year’s time than previously forecast.

While the share price forecasts for Lovisa and Universal have both been downgraded, UBS still rates them a buy given the broker still expects the stocks to appreciate over the next year.

Shares in Harvey Norman, Premier and Super Retail are all expected to fall from current levels over the next 12 months.

“The longstanding challenges for the Australian consumer, ­notably higher cost of living as per recent UBS research, have now materialised, with spending slowing and the prospect of a significant slowdown in FY24 across many retail categories,’’ the broker says in a note to clients.

“In mid-23 we feared such a slowdown, but it was delayed due to labour market strength (which remains for now) and accumulated savings (now exhausted).’’

UBS has downgraded its ratings on Accent, Domino’s Pizza, Premier Investments and Super Retail from neutral to sell.

UBS says the slowdown started in big ticket items, affecting companies such as Harvey Norman, but was starting to spread, with consumers looking to spend less in general, and buy cheaper items when they could.

“Looking forward, the consumer is reducing spending in aggregate and when they do spend they are trading down by price point in apparel and general merchandise, trading down by price point to private label in food, and from out of home to in home (albeit still early days).’’

UBS says younger and older consumers are the least affected, as are luxury brands such as Treasury Wine Estates, whose affluent customers “can better manage higher cost of living’’.

It is not all bad news for some more affordable retailers either, with those at the cheaper end set to benefit as shoppers look to trade down.

“In addition to avoiding big ticket retailers, we also avoid retailers that sell to middle Australia or that have been beneficiaries of a more exuberant consumer during Covid,’’ UBS says.

Travel is also being affected, with UBS saying savings had been a source of funding for travel expenditure for 60 per cent of the roughly 1000 respondents they surveyed.

“Home improvement spending intentions remain elevated but are starting to moderate,’’ the broker says.

UBS has downgraded its ratings on Accent, Domino’s Pizza, Premier Investments and Super Retail from neutral to sell while Harvey Norman was already rated a sell.

Woolworths on the other hand has been upgraded from neutral to buy, with a price target of $43 against $40.20 on Wednesday afternoon.

Wesfarmers and Treasury are both rated a buy with the 12-month price target unchanged for both.

UBS said the impacts of Covid explained in part a greater swing away from big ticket items now, with a trend during the height of the pandemic away from experiences – which in many cases shut down entirely – to buying goods and items associated with the home. This naturally tailed off as lockdowns eased, but the effect was being amplified by cost-of-living pressures.

UBS says Harvey Norman is also losing market share in a competitive market “noting an increased intensity from JB Hi-Fi not to let a sale go in this more challenging environment’’.

But JB Hi-Hi is not unaffected, with its 12-month price target $45, down from $47.50, against $42.48 on Wednesday, with UBS giving it a neutral rating on the stock.

On the ASX on Wednesday, Premier (owner of brands such as Smiggle and Peter Alexander) was one of the worst performers, down 4.9 per cent, while Accent dropped 4.5 per cent, Universal by 3 per cent, Super Retail by 2.6 per cent, JB Hi-Fi and Harvey Norman were each off 2.4 per cent and Lovisa eased almost 2 per cent.