Retail results may surprise on the upside: Deutsche

The retail sector could top earnings expectations, with Deutsche Bank labelling conditions “buoyant”.

Among the potential leaders flagged are electronic and household goods retailers Harvey Norman and JB Hi-Fi. Picture: Peter Wallis.

The retail sector could outshine muted expectations through earnings season, with Deutsche Bank confident it is performing better than the economic data would have the market believe.

In a note to investors, the investment bank said conditions were likely “buoyant”, despite last week’s Australian Bureau of Statistics data showing a modest 0.4 per cent lift in sales for the June quarter.

The 0.4 per cent advance came in shy of expectations for a 0.5 per cent lift.

“While macroeconomic data remain patchy, we believe retail conditions are buoyant, with a strong housing wealth effect and deflation in non-discretionary household expenditure improving consumers’ appetite to spend,” Deutsche analysts led by Michael Simotas wrote in a note.

“However, conditions vary by category.”

Among the potential leaders flagged are electronic and household goods retailers Harvey Norman and JB Hi-Fi as well as Domino’s Pizza.

Supermarket ­giants Woolworths and Coles may have lagged.

Mr Simotas said the demise of Dick Smith Electronics was likely to be aiding its longtime rivals, as there was no sign of the market “shrinking” in response.

“While our channel checks pointed to some softness early in the fourth quarter during the initial phases of the federal election campaign, the appliance, furniture and consumer electronics categories traded very well through June and into July,” the note said of possible upside to Harvey Norman and JB Hi-Fi.

“Importantly, the category ­cycled the difficult June base comparison with growth and the small business tax break represented a tailwind for the second year ­running.

“Discounting has also been benign in consumer electronics and while weather was an early drag on portable heating, the cold snap later in the quarter should have sufficiently offset this.”

The discounting trend in retail was seen most prominently in the clothing retail sector through May as wintry weather took a long time to develop. The grocery sector has been reporting deflation regularly amid rising competition.

The pricing pressure for the latter is likely to have not seen a let-up through the back end of fiscal 2017, and Deutsche is cautious on the likely results for Woolworths and Coles.

“Coles has warned of ‘deflation’ in the fourth quarter, which we interpret as a slowing like-for-like growth rate,” the analyst said.

“We expect a continued like-for-like decline in Woolworths sales with deflation offsetting modest volume growth.”

Deutsche also took a closer look at Flight Centre, which it expects to record higher volumes but lower commissions, while the outlook for the high-flying Domino’s was seen to be “strong”.

The report had an impact on the share market yesterday. Harvey Norman and JB Hi-Fi jumped 2 per cent and Domino’s Pizza advanced 1 per cent at 3.50pm (AEST). Woolworths and Coles owner Wesfarmers lagged the broader market by trading steady.

Meanwhile, Flight Centre stood out with a 4.7 per cent surge, but this was linked to a deal with financial services provider FlexiGroup in which its customers will be offered interest-free finance.