Chart of the Week: Inflation fears dampen sentiment on retailers
Rising inflation is the fly in the ointment.
Mentioned: Endeavour Group Ltd Ordinary Shares (EDV), Kogan.com Ltd (KGN), JB Hi Fi Ltd (JBH), Harvey Norman Holdings Ltd (HVN), Super Retail Group Ltd (SUL)
This week’s chart comes from Johannes Faul with insights fromthe latest industry Pulse forAustralian Retailing.
Consumer outlook
Faul states that after a multiyear slump, consumer sentiment is now positive.
Real household incomes are growing again, savings rates are back to normal levels and interest rate cuts help household budgets. These factors are supporting discretionary spending.
Inflation woes
However the solid rebound in consumer demand is outstripping supply, pushing up inflation past the Reserve Bank of Australia’s target band.
Money markets are now implying two interest rate hikes by late 2027, a near 100-basis-point pivot from the two cuts expected just a few months ago.
Higher inflation expectations are reflected in the share prices of cyclical retailers. While the sector trades at fair value on average, we see large discrepancies across the stocks. Consumer electronics retailers JB Hi-Fi and Kogan are at opposite sides of the valuation spectrum, overvalued and undervalued, respectively.
Defensives show better value than cyclicals on average
Overvalued cyclicals have retreated from lofty valuations. Nevertheless, JB Hi-Fi, Harvey Norman, and Super Retail are expensive. We forecast competition constrains their profit margins, differing from the market’s expectations.
Endeavour’s struggles are related to weak consumer demand, not competition. Liquor retailers are reacting to cyclically soft demand with more promotions, hurting margins. But we expect these heightened discounts to ease and liquor sales momentum to improve alongside household incomes.
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You can find previous editions of Chart of the Week here.
