More bad news in store for Australian retailers: analysts

Australia’s legion of publicly listed retailers could be only at the beginning of a painful unwinding of sales and earnings growth that could take another three years to play out.

Australia’s retail sector faces a slow recovery similar to that seen in the wake of the GFC. Picture: Getty Images

Australia’s legion of publicly listed retailers could be only at the beginning of a painful unwinding of sales and earnings growth that could take another three years to play out, repeating the slow recovery for the sector seen in the wake of the Global Financial Crisis almost two decades ago.

Reflecting on the wipe-out during the GFC – highlighted by slumping sales and collapsing share prices – Barrenjoey analyst Aryan Norozi has looked at the experience of US retailers 15 years ago to assess “how bad it can get” in Australia, with his findings suggesting local retailers are probably only in the early stages of a years-long decline.

After analysing the performances through the GFC of 36 large US retailers, including Best Buy, Home Depot, Macys, Nordstrom and Urban Outfitters, Mr Norozi found that on average peak-to-trough like-for-like sales fell about 15 per cent over two years, taking another three years to fully recover. US retailer share prices underperformed for about two years – which the analyst has labelled Stage 1 and 2 – before bottoming in Stage 3.

The bottoming experienced in the final stage before recovery was defined as occurring when consensus earnings-per share downgrades became less severe.

“While Australia is well progressed in ‘Stage 1’ of the cycle, we believe it is too early to change our cautious sector view, given we are still in the early stages of the EPS downgrade cycle,” Mr Norozi said when applying his analysis of the US retail experience to Australian retailers. “We believe US retailer share prices bottomed once the second derivative of analyst EPS downgrades turned positive (that is, less deep cuts). However, it took the US market around two years to find a bottom.

“With ASX retailers under­performing around 26 per cent since the December 2021 peak, we believe Australia is now well progressed in ‘Stage 1’.

“However, we believe we are still in the early innings of EPS downgrades with the ‘bad news’ likely to materialise over the next three to six months.”

Barrenjoey made significant earnings forecast cuts to discretionary retailers including JB Hi-Fi and Kogan. Picture: Annette Dew

Mr Norozi’s note follows a similar warning from Barrenjoey Capital Partners last month. The investment bank made significant earnings forecast cuts to discretionary retailers. Most at risk were JB Hi-Fi and Kogan, Barrenjoey’s Tom Kierath said.

Macquarie has also downgraded the outlook for the discretionary retail sector to underweight, given concerns about spending by Australian consumers.

Mr Norozi concedes that no two economic cycles are the same, but there are a number of similarities between the GFC and the current economic volatility. Most notably in 2007 to 2009, as is the case now, there was rising inflation, rising interest rates, falling housing prices and falling consumer confidence.

In the US, retailer share prices bottomed in November 2008 despite consecutive earnings downgrades through to December of that year. The key drivers of share prices holding firm were bad news being out of the way and the magnitude of second waves of earnings downgrades easing. “Australian discretionary retailer share prices have underperformed the ASX Industrials by about 26 per cent since peaking in December 2021, and are now back to pre-Covid levels,” Mr Norozi said.

“While we believe Australia is well progressed in ‘Stage 1’ of the GFC playbook, we believe it is too early to pivot to a positive sector view, given downwards earnings revisions have further to go … and ‘bad’ news likely to come over next three to six months. We expect further analyst downgrades over the next three to six months as the ‘story’ of weaker consumer conditions flows through to listed retailer earnings.”

In the US youth apparel retailers outperformed, with Claires, Urban Outfitters, Foot Locker and VF Corp experiencing significantly lower like-for-like sales declines. Based on his analysis, Mr Norozi said Barrenjoey favoured a number of discretionary retailers such as fashion retailer Universal Store, candle and homeware retailer Dusk, jeweller Lovisa, furniture chain Nick Scali and wholesaler Metcash.