Rising jobless rate hits retail

The Australian unemployment rate rose to 5.3 per cent from 5.1 per cent in January, despite an increase in the number of jobs added for the month.

This figure could hit 5.5 per cent this year as novel coronavirus and the China slowdown weigh on Australia's economic growth.

“Considerable labour market slack remains, with underemployment rising to 8.6 per cent," says Westpac senior economist Andrew Hanlan.

"Wages growth is set to remain weak and inconsistent with an economy on a sustainable expansion path,” said Hanlan.

The average weekly ordinary time earnings for full-time adults in Australia rose to $1,659 in November 2019, up 3.2 per cent from a year earlier, ABS figures reveal. This equates an annual salary of $86,268.

The more accurate reading of wages growth, the seasonally-adjusted Wage Price Index, rose 2.2 per cent through the year to 31 December. Private and public sector wages rose by the same rate – their lowest growth levels since the start of the index in December quarter 1997.

Labour underutilisation – too many people getting fewer working hours than they want or need – was the main factor suppressing wages growth.

Some retailers have struggled with these soft economic conditions.

Westfield shopping centre owner and operator Scentre Group (ASX: SCG) recently reported a full-year net profit of $1.18 billion. This was down 48.4 per cent from $2.29 billion a year ago, weighed down by big costs including property revaluations.

But the company's funds from operations, the main gauge of how the company is performing, came in at $1.344 billion, up just 0.4 per cent from $1.3395 billion in 2018.

“Higher household indebtedness and online sales growth are expected to result in a slowing sales growth trajectory,” says Morningstar analyst Johannes Faul.

“In this context, we believe Scentre Group will face significant challenges in repeating its historical rental growth rate, given that tenants are expected to resist agreeing to traditional annual increases of CPI plus 2 per cent without corresponding revenue growth."

This should result in lower income growth, which will in turn depress property values.

Faul has maintained his fair value estimate of $3.85 for Scentre following its latest result. The stock was trading at $3.70 at 1pm Monday, slightly above its 52-week low of $3.63 from early May 2019.

Earnings season has revealed mixed results for other retailers.

JB Hi-Fi (ASX: JBH) appears immune to high debt levels and sagging wages growth, at least in the short term. The consumer electronics retailer's sales momentum has picked up for the group's key businesses as it takes market share from other retailers, says Faul.

JB Hi-Fi’s profit rose 6.6 per cent to $170.6 million for the first six months to 31 December. Sales growth in communications, audio, computers, visual and accessories led to the company’s revenue lifting to nearly $4 billion, almost 4 per cent higher than last year.

“Sales growth strengthened in January 2020 with no apparent impact of mooted coronavirus fears on its customers' confidence,” says Faul.

“JB Hi-Fi sales of electronic equipment are up. But it is partially driven by them taking market share from competitors, hence JB’s sales are growing faster than sector revenue."

But higher unemployment is a headwind for JB HiFi and other retailers that rely on discretionary spending.

“When unemployment rises, consumer sentiment generally deteriorates," Faul says.

"There are less people earning a salary/wage to spend, and people with jobs are more concerned about their job security and tend to spend less."

Supermarkets safer but not immune

For the big supermarket retailers, Coles (ASX: COL) and Woolworths (ASX: WOW), however, their earnings will be more resilient if unemployment continues to rise.

Both are defensive stocks, and people still buy grocery items even if unemployment rises.

“Shares in no-moat Coles are priced to perfection, up some 40 per cent over the past 12 months on only moderate earnings growth," says Faul.

"Coles is proving it is a resilient business, but we contend the upside is limited."

He has a fair value of $12.50 on the stock, compared to its market price of $15.72 as at 1:30pm Monday.

Faul maintains his fair value estimates for narrow-moat Woolworths at $27.50, which last traded at $43.45.

No-moat Metcash (ASX: MTS) shares are currently around 25 per cent above what Faul believe it's worth, trading at $2.80 at 1:30pm Monday versus a fair value estimate of $2.30.