Universal Store on track for record sales, but shares tank 24pc on poor consumer outlook

The fashion retailer is on track to post record sales in 2023, but has warned the shopper is beginning to pull back on spending, with its shares collapsing 24 per cent.

Universal Store shares slumped 24 per cent after the fashion retailer warned of a pullback in consumer spending since April, with typical shoppers at the chain only picking up one pair of jeans as opposed to the standard three or four pairs for the new season as higher rents and other cost-of-living pressures weigh on disposable incomes.

Despite flagging record annual sales, Universal Store shares fell to $3.16 after it warned of tougher economic conditions and a softness in spending by younger consumers – the retailer’s key demographic.

Analysts listening in to a briefing following the trading update became increasingly concerned about the severity and protracted length of the expected downturn in consumer spending, and as the trading day wore on shares in Universal Store were pushed lower as many rethought their assumptions for consumer spending – particularly among 20-something shoppers.

The poorer and more pessimistic outlook on the state of the shopper spooked investors, with fears that younger consumers especially could be reining in their spending.

Shares in Universal Store ended down 24 per cent at $3.15 – their lowest level since Universal Store listed in late 2020 at $3.80. The retailer’s market value tumbled by $76m to $241m.

Universal Store said it was on track to deliver record sales and strong growth in earnings for the current fiscal year, but its warning that it had witnessed a tightening in trading in April and May dominated the thoughts of markets.

The warning from Universal Store of a consumer downturn could be the first of many discretionary retailers to detect a shift by consumers. It is believed that, while typical Universal Store customers had been immune to interest rate rises (given they still lived with their parents or were renting), rent increases and other rises in the cost of living were affecting their spending habits and forcing them to rein in their spend on fashion and clothing.

The fashion and accessories chain has also picked up on increased promotional activity in the marketplace from its competitors, which points to some overstocking in the market, forcing many retailers to push the button on clearance sales to rid themselves of unwanted stock.

“Despite a deteriorating macro environment, and increasingly clear signs that the youth customer is seeing pressures on their discretionary spending levels, fiscal 2023 is on track to be a year where the group delivers significant financial and operational milestones,” the company said in a trading update issued to the ASX on Wednesday.

Universal Store’s sales are expected to be in the range of $258m-$261m, up from $208m in 2022, and underlying earnings to be between $39m and $41m, which would be up from earnings of $32.6m in 2022.

The retailer said its new Perfect Stranger retail format was performing strongly and continued to demonstrate its strong ­potential for an economically attractive national rollout.

Universal Store said a total of 95 physical store locations were expected to be open as at June 30, comprising 77 Universal Store sites, eight Perfect Stranger sites, and 10 THRILLS stores. Four new store openings, originally slated for the second half, were now expected to open in the first quarter of 2024.

It said gross margins were expected to moderately exceed 61.1 per cent delivered in 2022.

The retailer said group margins and business unit inventory levels had been well managed against a backdrop of increased promotional discounting from peers and evidence of overstocking in the market.

“The group results speak to the strength of the business model as well as its agility and skill in navigating market volatility,” it said.

It said more recently, trading conditions observed in April and May to date had further tightened, indicating that some customers were reducing their spending.

“The group expects this subdued environment to continue for the balance of fiscal 2023 and into fiscal 2024. We are comfortable with the current inventory position across the group,” it said.

In a briefing to analysts, the company said younger shoppers were pulling back their spending, buying less clothes for the new season for example, and putting less in their shopping baskets.