Retailers, consumers facing worst economic outlook in 15 years: analysts

The worst economic outlook in 15 years, including a 13 per cent jump in living costs for Aussies, will put the brakes on spending at stores and slash profits.

Analysts warn ‘winter is coming’ for retailers and consumers as soaring inflation and a pullback in spending on discretionary retailers threatens to plunge sales and trigger a string of profit downgrades across the sector. Picture: Gaye Gerard/NCA NewsWire

Australian retailers are facing the worst economic outlook in 15 years as soaring inflation, higher borrowing costs and a strain on household budgets push down consumer confidence.

Companies in consumer electronics and fashion – reliant on discretionary spending – are the most exposed, say investment bank equities analysts.

In a note to clients on Tuesday, Barrenjoey Capital Partners said it had made significant earnings cuts to discretionary retailers. Most at risk was JB Hi-Fi and Kogan, Barrenjoey’s Tom Kierath said.

Despite shoppers stashing away funds during the Covid-19 lockdowns, that reservoir of savings – estimated to be as high as $450bn – could be quickly soaked up by the rising cost of living which is forecast to jump 13 per cent in 2023, Mr Kierath said.

For one investment bank to predict this dire scenario is worrying. More concerning is when two highly-regarded teams of equities analysts independently issue reports about the coming economic upheaval and its impact on consumers and retailers.

Mr Kierath – and co-authors Peter Marks and Aryan Norozi – have reviewed earnings forecasts across the 12 non-food retailers. The analysts revised down earnings and price targets on much of the sector.

JB Hi-Fi, which closed down 5.7 per cent on Tuesday at $39.31, now has a share price target from Barrenjoey of $42, compared to Barrenjoey’s previous forecast of $55, down some 24 per cent. Premier Investments, which owns a number of well-known brands, has had its price target lowered from $32 to $26.30. It traded down 3 per cent on Tuesday at $20.22.

Released at the same time was a new report from researchers at Macquarie focused on the consumer and titled “Winter is coming” – a phrase borrowed from TV series Game of Thrones that relates to impending doom.

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

For many investors that feeling of impending doom became very real on Tuesday as retail stocks plummeted along with the broader market following a dive on Wall Street overnight. Among the bigger losers were Wesfarmers, down 3.82 per cent to $42, Woolworths, Harvey Norman, Myer and Kogan.com

“We have become increasingly concerned with the economic outlook for Australia and the impact that rising inflation and interest rates hikes are likely to have on discretionary spending,” Macquarie analysts told clients.

“From a top down perspective consumers appear to be in a strong position to continue to spend. However, it is not just an ability to spend that is important. Consumers also need to be willing to spend, and that willingness appears to be quickly contracting.”

Mr Kierath’s note warned of some of the most challenging economic conditions for more than a decade that will weigh on retailer earnings.

“We can’t think of a time in the past 15 years when the consumer macro-outlook has looked more challenging. Consumers face a cocktail of higher costs – borrowing, petrol, food, energy, insurance, which is not being offset by higher wage growth, while asset prices … are falling.

“Government stimulus is set to be wound back too. It’s easy to see why consumer confidence is back to GFC levels. Increasingly, we think 2023 will be as difficult as 2019, potentially worse in some categories – suggesting consensus forecasts are too optimistic.”

Mr Kierath said he had recalibrated his retail outlook to capture a more challenging macro environment which drives significant earnings cuts.

“Our industry discussions indicate that trading slowed in late May. Cost of living pressures are set to bite hard such that spend on discretionary retail will slow, especially in the electrical/furniture categories where spending is most above trend.”

He warned the electrical category had experienced the highest cumulative overspend since Covid-19 began and that as the consumer electronics markets began to normalise margins across the category would be squeezed, denting profits.

Spending on discretionary goods – from flatscreen TVs and furniture to kitchen appliances and clothing – was also highlighted by Macquarie analysts, with consumers forced to spend more on staples, such as food and energy, and having less in their budgets to spend on other items.

And the estimated hundreds of billions of dollars in pent-up savings stashed away by consumers during the pandemic might not be enough to protect some households from soaring inflation.

“Our analysis shows that the cost of living – housing/loan interest, rent, petrol prices, energy, insurance and food – which accounts for $45,000 per household, will rise 13 per cent in 2023,” Barrenjoey’s Mr Kierath said.

“The $450bn consumers saved through Covid is skewed towards high income households. This means the middle/lower income cohorts will likely face significant challenges.

“While most consumers will likely face faster wage growth in the year ahead, we do not think it will be enough to offset growth in households’ expenses.

“The natural reaction will be to pull back consumption on discretionary categories, especially in those that had a demand pull-forward through the Covid period.”

It comes as retailers face earnings challenges including waning demand, higher discounting to clear excess stock, and cost pressures ranging from rising wages following the Fair Work Australia minimum wage decision, rent increasing with CPI – or higher – and freight and logistics costs.

“Cost of living inflation is likely to hit consumers hard in 2023,” said Mr Kierath.