Retailers’ results reveal shoppers are slowing down fast
Putting up prices may keep margins looking good but sales are cooling, as results from JB Hi-Fi and Nick Scali reveal.
Sharemarkets have bounced impressively since the beginning of the year, perhaps reflecting that the market was cheap for companies growing earnings at double-digit rates, especially those whose shares had also been thrown out with the proverbial bathwater.
Many investors, however, believe the rally recently enjoyed is merely a so-called dead cat bounce, a bear market rally that will soon run out of puff and in due course, reverse.
That could be true. But this week I am not going to offer a prediction of what happens next. Instead, I want to discuss what is happening right now.
Emerging from reporting season is a clear trend in consumer behaviour.
Rising rates, their impact on mortgage repayments and the effect on disposable income from rising fuel and energy costs was long predicted to result in a recession as consumers digested their Covid-19 related purchases and refrained from buying more.
The half-year results of two high-quality bellwether consumer companies reveal a striking similarity and confirm the predicted slowdown in consumer spending is indeed under way. And their results, particularly their gross margins, might also suggest inflation is not purely the result of strong consumer demand. Could it also be the result of price rises unilaterally imposed by business?
Nick Scali’s first-half sales revenue of $283.9m was up 57.4 per cent compared with the first half of FY22. Meanwhile, the company’s net profit after tax (NPAT) of $60.6m was up 70.2 per cent on the corresponding half last year, ahead of the company’s own November market guidance of $56m to $59m, and also ahead of the consensus analyst estimate of $56.6m.
This all seems very desirable but towards the end of the half, conditions appear to have deteriorated.
What does the future look like?
Nick Scali provided a trading update to the end of January 2023, putting what appears to be a positive spin on the month’s trading; “January is our strongest trading month and was better than our expectations … We had anticipated a slowdown compared to the Covid-19 boom, yet trading remains better than pre-Covid 19 despite rising interest rates”.
The company said “Nick Scali brand January written sales orders were 12.1 per cent below January 2022 and 22.9 per cent above pre-Covid 19 January 2020”.
In other words, the strongest trading month for the year was weaker than last year. This
suggests the consumer pullback is under way and arguably does not bode well for the rest of the half.
Understandably, the company said it was “difficult to provide further guidance”.
On the subject of inflation and margins, a company’s gross margin is the difference between what it buys its goods for and what it sells them for.
An improvement in gross margins means the company is making more money than it did previously from buying and selling its goods. Given the sensitive nature of inflation’s impact on the cost of living and quality of life, it’s interesting to see how companies explain improving gross margins.
Over at JB Hi-Fi, consumers are also zipping up their wallets and this is having a strikingly similar effect on results.
Australian JB Hi-Fi stores enjoyed sales growth of 9.1 per cent to $3.59bn. Meanwhile, same-store sales growth was 8.5 per cent, thanks in part to the company cycling negative growth of 2.5 per cent in the prior corresponding period.
Much like Nick Scali’s result, however, the company saw a meaningful slowdown in the year’s second quarter.
For the first quarter, sales grew 14.6 per cent, but sales growth slowed to 5.6 per cent in the second quarter.
Over at the Good Guys – the company JBH acquired in 2016 for $870m – total sales were up 7.3 per cent to $1.54bn, with same-store sales growth rising by precisely the same percentage of 7.3 per cent. The Good Guys also experienced a sharp decline in the second quarter to December 31. First-quarter sales growth was 12.3 per cent and second-quarter sales growth slowed to just 3.3 per cent.
And like Nick Scali, gross margins are improving. The company reported gross margins of 22.85 per cent versus 21.77 per cent in the prior period. Was this due to a favourable “mix-shift” in the products being sold compared with a prior period, or is it due to the company raising prices beyond the rising cost of its inputs?
As a major Australian retailer, JB Hi-Fi can play an important role keeping inflation in check.
The gross margin at The Good Guys was 23.21 per cent compared with 22.58 per cent in the prior corresponding period.
As part of its release to the market, JB Hi-Fi also provided a trading update revealing conditions in January 2023. JB Hi-Fi Australia’s total sales were up just 2.5 per cent with same-store sales slowing again to just 1.5 per cent.
And over at The Good Guys, total sales were flat (growth of 0.0 per cent) and same-store sales were likewise flat.
And just like Nick Scali, the rapidly slowing sales growth, talk of a recession and rising interest rates, did not inspire management to provide any forecast for FY23.
Australia is in the eye of the storm. Both Nick Scali and JB Hi-Fi confirmed consumers are now pulling their heads in at a time rates are rising, and are predicted to continue doing so. The market bounce is welcome but could be short-lived for investors who fail to choose carefully.
Roger Montgomery is founder and chief investment officer at Montgomery Investment Management
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