Retail fears cash-tight Christmas

Christmas will be far from the cash splash bonanza many retailers are hoping for as shoppers pull back on holiday season spending.

Christmas will be far from the cash splash bonanza many retailers are hoping for as skittish shoppers pull back on their holiday season spending as pressures on household budgets, softer housing prices and tighter lending conditions from the banks shave discretionary spending.

UBS analyst Ben Gilbert said in a note to clients yesterday that national retailers such as Super Retail Group, jewellery store Lovisa, furniture chain Nick Scali and Electrolux were pointing to softer trade but that this had yet to show up in government statistics.

“While this is yet to show up in ABS figures we expect Christmas to be challenging, creating risk to forecasts,’’ Mr Gilbert said.

“We see risk to discretionary earnings given weakening spending, high fixed-cost leverage, inventory risk and competition.

“Under our base case we now assume discretionary sales will slow to 1.2 per cent year on year versus about 3 per cent in the past three years.’’

The true state of retail as the sector approaches the critical Christmas period will become more clear as major chains such as department store Myer, Solomon Lew’s fashion empire Premier Investments and Harvey Norman hold their AGMs in coming weeks and update shareholders on trading up to November.

Already in the lead-up to Christmas there have been profit warnings and dour sales outlooks from listed retailers such as The Reject Shop and Lovisa, while other chains such as Super Retail Group and Noni B have testified to the tough trading conditions and intense competition.

UBS sees earnings most at risk under this scenario to companies such as Harvey Norman, Breville Group, Super Retail, JB Hi-Fi and Myer. UBS has changed Breville and Myer to “sell”.

However, UBS does see some good news for the $90 billion grocery sector, which could show ­better results compared with discretionary retailers.

Mr Gilbert said the outlook for supermarkets was improving due to easing deflation, easing promotional activity and discounting and a generally more “rational” market when it came to pricing.

UBS has upgraded its 2019-20 supermarket growth forecasts to about 4 per cent, from 3.5 per cent previously, driving a 1-2 per cent upgrade to forecasts for Woolworths and wholesaler Metcash.