Discount and online retailers look set to win the Christmas consumer spending race

Rising inflation and interest rates is leading to the consumer Christmas spending test in 2022
eToro said consumer spending trends are changing, including downtrading to cheaper goods
Online spending is outperforming with optimism for Black Friday, Cyber Monday & Christmas

‘It’s the most wonderful time of the year…. It’s the hap-happiest season of all’. Christmas 2022 is shaping up to be merry for discount and online retailers.

Consumer spending trends have been changing significantly, shifting away from goods towards services, while downtrading to cheaper goods, according to figures released by eToro.

The global investment platform said discount retailers now rank ahead of department stores in Christmas spending popularity.

Online spending is also outperforming, growing 10-12%. This year 50% of retailers have restocked earlier, given supply chain concerns and the forecasts that shoppers would start earlier to spread budget pressures.

eToro global markets strategist Ben Laidler said rising inflation and interest rates globally defines the consumer Christmas spending test this year and changing trends.

Australian inflation has jumped to 7.3% over the year to September, its highest level since 1990.

Trimmed-mean inflation, the RBA’s preferred measure that trims away large price movements, rose 1.8% in the quarter and 6.1% annually.

“We are entering the strongest period of consumer spending of the year and the most profitable one for retailers, but this year is a big test,” Laidler said.

“Consumers have been spending down pandemic savings, inflation is high and has turned real wage growth negative, whilst stock market and housing wealth effects have plunged.”

He said the one big support is generational low unemployment, which is currently 3.5% in Australia.

“The likely result is a near halving of estimated spending growth versus last year, but to still healthy levels,” he said.

In the US, consumer spending drives 70% of the economy and is the biggest anchor for global growth. Discretionary stocks have been some of the weakest this year.

Black Friday, Cyber Monday & Christmas optimism

At home eToro market analyst Josh Gilbert said retail sales data shows that Aussies are continuing to spend, despite recent economic factors.

“Retail sales rose 0.6% in September, showing continued resilience in the face of higher interest rates and inflation,” he said.

“I would expect this strong spending trend to continue into the end of the year, with Black Friday, Cyber Monday and Christmas all around the corner.”

He said the Australian Retailers Association (ARA) expects spending around Black Friday and Cyber Monday to be around $6.2 billion, which signifies a 3% increase from last year.

“This could indicate Aussies are looking to find a bargain ahead of Christmas, particularly if households are feeling conscious about their shopping budgets,” he said.

“This sentiment may also prompt consumers to shop with cheaper retailers, for example Kogan instead of JB Hifi, or Kmart over Myer.

“However, for now, department store spending is still strong in Australia despite a slight drop in September, at $1.91 billion.”

As Morningstar retail analyst Johannes Faul told Stockhead’s Christian Edwards recently heading into Christmas trading, discretionary categories are outperforming consumer staples like food and liquor.

“Department stores, fashion retailers and restaurants have bounced back strongly from subdued trading a year ago, when the Delta outbreak kept their customers away,” Faul said.

Discount retail and e-commerce stocks to watch

The Reject Shop (ASX:TRS)

Long time retailer discount variety story chain TRS sells a range of everyday goods that typically persist throughout the economic cycle.

It has been a top pick of Datt Group managing director Emanuel Ajay Datt and VP Capital co-founder John So during this inflationary period.

The budget retailer has seen its price rise ~16% in the past month.

Kogan (ASX:KGN)

The online retailer could do with some Christmas joy after delivering its full-year loss after-tax of $35.5 million in FY22 and seeing its share price fall ~64% in the past year.

“The financial year was significantly impacted by ongoing Covid-19 related interruptions and associated fluctuations in demand, experienced across the entire retail industry, resulting in increased logistics and other operating costs,” Kogan said in an ASX announcement.

“The company has made significant progress to achieve a leaner business model in the second half of FY22, by right-sizing inventory and reducing associated operating costs.”

Kogan, which sells everything from clothes, furnitures, electrical items, credit cards, insurance and pet gear will be hoping the peak shopping season helps turn its fortunes around.

In a positive sign the Kogan share price is up 0.93% in the past month.

Lovisa (ASX:LOV)

Diamonds are a girl’s best friend, but if you can’t afford the real precious stone you could head into the cheaper ‘fast fashion’ jewellery store.

Youth-orientated LOV has built up a huge global presence of 629 stores, with only 154 on Australian shores.

LOV raked in $458 million of sales in FY22, 20% higher on a comparative basis (excluding new stores). Top line turnover is being felt on the bottom line, with net earnings climbing 116% to $60 million.

Sales have continued to climb in FY23 and with peak formal season around Australia and Christmas approaching, LOV may continue to feel the love.

LOV was promoted to the S&P/ASX 200 in the September rebalancing. The LOV share price has risen ~12% in the past year and 3% in the past month.

Temple & Webster (TPW)

The online furniture and homewares store will also be seeking out some Christmas cheer with its share price falling 56% in the past year and ~10% in the past month.

The fall is despite TPW announcing a 31% boost to revenues in FY22 to $426.3m and 142% on a two-year period, which equates to a 55% two-year CAGR.

EBITDA margin of 3.8% was at the high end of the company’s 2-4% target range; this includes an investment of $1.7m in the TPW’s new home improvement site The Build.

Booktopia (ASX:BKG)

Who doesn’t enjoy reading a good book over the summer holidays? The online book retailer has experienced a challenging year including the resignation of its CEO and co-founder Tony Nash and an ACCC penalty.

Furthermore, its share price has fallen more than 90% in the past year. In the recent 2022 annual report to shareholders chair Chris Beare and acting CEO Geoff Stalley acknowledged BKG’s tough time.

“The year under review will go down as one of the most challenging in Booktopia’s 18-year history,” they said in their address.

“While the company’s performance across a range of critical operational metrics was quite positive, the result was overshadowed by increased costs associated with Covid and several one-off items, which had a negative impact on our earnings.

“While the results for the year were not what we had hoped or planned for, they provided a range of learnings which we are using to position the business to meet the challenges and opportunities that lie ahead.”

Revenue was up 7.5% to $240.8 million and shipped units up 4% to 8.5 million. Average order value increased 6% to $75.59, while average spend per customer, per year was up 6.4% to $134.94.

“On the earnings side, Underlying EBITDA fell 54% to $6.2 million (FY21 $13.6 million) due to increased customer fulfilment costs associated with Covid and other increased costs, which had a negative impact of approximately $8.7 million on EBITDA,” the report said.

But turning the page for positive news, BKG announced in August that it had signed a lease for a new 20,000sqm Customer Fulfilment Centre (CFC) at South Strathfield in Sydney’s west.