Criterion: Look out for retail earnings surprises amid choppy trading conditions

Discretionary retailers’ recent trading updates have been a mixed bag
Consumers are willing to spend on some things, but not on others
Despite the gloom, some underperforming stocks are recovering

Recent headlines suggest the discretionary retailing sector is in a world of pain as the cost of living crunch continues to outstay its welcome.

But dig a little deeper and the picture is far more nuanced – if not a tad baffling.

Consumers are splurging on some things and not others, while retailers are being influenced by individual factors that affect their performance.

In Wednesday’s trading update, the sprawling Accent Group (ASX:AX1) said sales and margins for the first six weeks of the second half had been affected by customers seeking “value offers”.

In other words, they’re buying Dunlop Volleys from Kmart rather than patronising Accent’s brands The Athletes Foot, Vans and Timberland outlets.

On the same day, the administrators of Mosaic Brands announced Millers and Noni B would close, having already flagged the demise of menswear brand Rivers.

Last month Wesfarmers (ASX:WES) pulled the pin on the loss-making Catch, the online portal it acquired for 2019 for $230 million.

But that’s spare change for the owner of Bunnings and the learning experience made it all worthwhile.

Trading updates fail to inspire

Ahead of last week’s successful vote by Myer (ASX:MYR) investors to merge with Premier Investments’ (ASX:PMV) apparel stores, both companies pointed to (disappointing) flat sales.

This was blamed on “challenging macro-economic conditions”.

Jeweller Michael Hill (ASX:MHJ) last week also drew on “prevailing macroeconomic pressures” to warn of a 23-28% decline in underlying earnings to $22.5-24 million, with flat-ish sales of $359 million.

Laggards fight back

Also announcing underwhelming numbers, online leader Kogan (ASX:KGN) showed its pandemic glory days were well and truly over.

Yet, some of the underperforming specialist retailers are fighting back.

Baby Bunting (ASX:BBN) flagged a December half profit of $4.8 million, up 37% with comparative (same-store) sales rising 4.5%.

The company said “well-executed” campaigns resonated with its customers.

Over at the battered, plus-sized clothier City Chic Collective (ASX:CCX), underlying earnings are expected to be $3-4 million compared with a previous $4.4 million loss.

The chain’s local sales grew 2.8% with the geography performing “well above the group’s expectations”.

Discretionary spending trends ‘more positive’

A UBS survey of the spending intentions of 1000 consumers shows outlays remain “skewed to essentials”, with discretionary spending “mixed but incrementally more positive”.

Householders haven’t lost their taste for alcohol, fast food and home improvement (which increased markedly).

High-income earners continue to travel here and abroad.

UBS suggests that consumers “recalibrated” their earnings intentions in early 2024 and the worst is over.

A buoyant labour market means secure income, while population growth supports the sector.

Meanwhile, Goldman Sachs expects electronics and appliances, health and beauty and online marketplaces to remains strong with apparel and footwear mixed.

Dont be surprised by earnings surprises

So expect a few surprises when the retailers roll out their full half-year results this month – especially from those that have not delivered trading updates.

These include Super Retail Group (ASX:SUL) , Shaver Shop (ASX:SSG) , Nick Scali (ASX:NCK) recovering scented-candle purveyor Dusk Group (ASX:DSK) and Lovisa Holdings (ASX:LOV) (which this week copped a staff underpayment class action).

Some ‘discretionaries’ have had a decent share price run already.

For instance Goldman Sachs likes JB HiFi (ASX:JBH), which has a history of pleasant earnings surprises.

But the firm rates the stock a sell on valuation grounds. With a less impressive tech presence, Harvey Norman Holdings (ASX:HVN) is also sin-binned.

On the flipside, the firm also believes the worst is behind Domino’s Pizza Enterprises (ASX:DMP), which is trading at a much lower multiple than its fast-food peers.

While we are facing a cost-of-living election – possibly mitigated by a pre-poll interest rate cut after this week’s encouraging inflation numbers – investors should look beyond the political rhetoric to how retailers are faring at a granular level.

Valuations are crucial: as shoppers know, it’s all about price, price and price.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision.