Chart of the Week: ASX retail offers pockets of value in softening conditions
Why slowing consumer spending could create opportunities in overlooked retail stocks.
This week’s insights come directly from Johannes Faul in the Industry Pulse: Australian Retailing Q3 report. The full report is available to Morningstar Investor subscribers and trialists.
Retailing likely to wane under mounting pressure
Faced with tightening budgets, shoppers are prioritising everyday essentials. Johannes anticipates a resurgence in fuel prices and further monetary tightening as early as late September which is expected to throttle consumer spending. Notwithstanding, we expect mid-single-digit income growth to underpin 4% growth in retail sales in fiscal 2027. This is slightly lower than 5% growth last year but broadly in line with the retailing industry’s long-term average.
Retail sales growth varies significantly across categories. In defensives, groceries are outperforming liquor. Woolworths’ (ASX.WOW) popular collectibles campaign is driving its outperformance relative to Coles (ASX.COL). Comparatively, Johannes notes that IGA’s (ASX.MTS) weak online platform puts its network of independents at a disadvantage.
The market may be overlooking discretionary retailers
Discretionary stocks are cheap on average. We anticipate that shelf price increases and income growth will underpin solid discretionary spending growth despite subdued consumer sentiment—a potential share price catalyst.
Defensive retailing shares are on average fairly priced. Supermarket sales are robust against this challenging backdrop however Coles and Woolworths are now both expensive. Endeavour remains Johannes top pick in this space. We forecast liquor sales growth to improve year-on-year. Liquor is a lower-growth category with younger cohorts: Generation Z and millennials are moderating their liquor consumption.
Yet we think demand is relatively defensive, underpinned by inflation, an attribute underappreciated by the market at Endeavour’s current share price.
While consumer conditions may be weakening, opportunities remain. The challenge for investors is distinguishing between retailers facing structural headwinds and those positioned to benefit through the cycle.
