UBS highlights the retail winners and losers to emerge in reporting season

Retailers that cater to affluent households and those chains that benefit from under-strain consumers trading down should be among the winners this reporting season.

As the earnings season picks up this week and a wave of household names report, there is a bias from analysts towards retailers that cater to cashed-up consumers and affluent households, and retail chains that can be the beneficiaries of other consumers trading down.

Spending growth for many households is expected to be skewed to essentials as they face cost of living pressures, while those shoppers with more disposable incomes will favour more premium retailers, creating winners and losers among the $420bn retail sector.

In its retail and consumer sector reporting season preview, UBS has pointed to a growing divide between households that will play out through the first-half financial results revealed in coming weeks, as well as management commentary on outlook.

This week will see earnings results from consumer electronics giant JB Hi-Fi, Wesfarmers (the owner of Bunnings, Officeworks, Target and Kmart), Treasury Wine Estates and Beacon Lighting, followed next week by companies such as Woolworths, Domino’s Pizza, Lovisa, The Reject Shop and Super Retail Group.

UBS believes a large proportion of greater spending at retailers will be debt-funded rather than from wages and savings.

“As per the UBS consumer survey, spending growth is expected, yet this is debt- rather than income and savings-funded, and middle-income-led, with spending growth skewed to essentials while cost of living pressures continue, although they have arguably peaked,” UBS analyst Shaun Cousins said.

“To manage these pressures Australian consumers are being more discerning and trading down in food to private labels in grocery and some away from out-of-home consumption, (and) in apparel and general merchandise to lower price points.” For these reasons, Mr Cousins prefers companies with exposure to older and younger consumers (teens, non-renters), affluent consumers, and beneficiaries of trading down (for example, discount department store Kmart).

“Discretionary retailers now enjoy a consumer that in aggregate has been able to manage the peak of cost-of-living pressures, though headwinds remain, with the outlook for 2024 improving – updated stage 3 tax cuts, RBA rate cuts,” he said. “Consumer discretionary share prices will reflect the less bearish outlook for consumers, with a selective approach suggested.”

UBS has a buy rating on Dan Murphy’s BWS and pubs owner Endeavour as its regulatory risk is lower than feared and there is a gaming recovery in its hotels.

It also favours Harvey Norman due to improved sales execution and slowing margin declines.

Treasury Wine is chosen for the growth from its flagship luxury wine brand Penfolds and the anticipated removal of Chinese tariffs on imported Australian wine.

UBS has downgraded its rating for Wesfarmers to “neutral” from “buy” due to a range of factors at its operating businesses including rising costs at Officeworks, a challenging environment for its health division, led by Priceline pharmacy, and falling earnings at ­Target. However, in the current environment and with shifting consumer spending, Wesfarmers’s Kmart chain should gain market share as consumers trade down and Bunnings sales should benefit from market share gains in existing categories and entry into new ones, such as personal cleaning and pets.