Are storm clouds on the horizon for listed retailers?

Retailers are always fighting for the largest slice of the consumer pie, so what happens when the cost of living starts to take the biggest bite?

In early January, multinational payment and transactional services firm Worldline found New Zealand consumers opened their wallets more in 2022 than in any past year through its payments network. 

Core retail merchants – excluding hospitality – reached $35.9 billion, up 4.7% on 2021 and a 13.6% jump on 2019. Worldline said the average transaction size in 2022 was $52.01 – edging up 2.5% from 2021.

Last week however, Statistics NZ data showed retail spending had begun to falter in December, falling 2.5% after eight consecutive months of increases. 

It’s a sign that the pain of higher interest rates and gloomy economic sentiment that cast a long shadow over the end of the year is starting to bite into retail expenditure.

Where’s the pain currently?

The Warehouse is one retailer that’s definitely feeling the pinch.

The retailer surprised the market in late December after it announced it hadn’t seen the Christmas highs the retailer normally saw in its second quarter – instead, quite the opposite.

Total group sales for The Warehouse’s second financial quarter – the busiest time of year for the retailer – were down 5.5% due to cost-of-living pressures pinching consumers' wallets.

Investment advisory firm Jarden obviously felt similarly last week when it downgraded its rating for The Warehouse Group from neutral to underweight because of the Christmas slump.

Equity research vice-president Guy Hooper said Jarden had revised down the 12-month target price for the shares, from $3.15 to $2.45, due to the “disappointing” holiday trading update which highlighted slowing retail activity

“In our view, [The Warehouse Group] is most exposed in the sector to a broader slowdown given the degree of operating leverage in the business and its net debt balance.”

The Warehouse Group has confirmed on Friday that “approximately 190 roles” will be cut across its six retail brands in Auckland in a restructure proposal.

The Warehouse isn’t the only retailer that’s facing such struggles, with retailers across both sides of the Tasman feeling the strain.

In the case of Australian stock exchange-listed electronic retail company JB Hi-Fi, sales might have soared for its NZ arm in its half-year interim results, but NZ earnings dropped more than 25%, the retailer revealed last week.

Jarden analysts wrote last week that despite sales momentum continuing into January, Jarden remained cautious on the “consumer in general”.

They also said the macro environment would become “more challenging” and household goods would be materially impacted.

“We suspect volumes in the category are likely negative despite strong margins, with a return of discounting to drive negative sales.”

Sparkle in some retailers’ eye 

Michael Hill International appears to be pulling in the other direction – so far.

The retail jeweller said last week that it had seen “another record result” in the first half of its 2023 financial year, with its NZ segment seeing a nearly 14% jump in revenue.

Michael Hill said it expects earnings before interest and taxes in the 2023 half-year to be between $52 million and $55m, which was up from $51.6m in the first half of 2022. NZ revenue jumped 13.8%, Australia grew by 18% and Canada edged up by just 0.5%.

Hooper commented in a Jarden report last week that Michael Hill had undergone a “rejuvenation period” in recent years that had helped the brand materially improve its product offering and brand position. 

The jeweller remains one of Jarden’s preferred picks in the retail sector and “encouragingly” appeared to have maintained solid trading momentum through the 2023 second quarter, Hooper said, despite evidence of slowing consumer activity across other retailers.

“At this stage, we take a conservative view on growth given the short-term macro headwinds and difficulties with long-run assumptions about brand positioning, although we view management's recent performance as a positive indicator, with upside potential should it continue to deliver.”

Jarden felt similarly towards Briscoe Group, but hasn’t budged up its neutral rating for the popular retailer.

Hooper wrote last week that the retail chain was “better placed” to navigate the environment than its peers, thanks to its past track record and lower exposure to big-ticket items.

And even Briscoe Group managing director Rod Duke told BusinessDesk on Monday that the company was “probably in a slightly better position” than other retailers currently.

“The overriding thing everyone’s talking about is consumer belt-tightening,” Devon Funds head of retail Greg Smith told BusinessDesk.

“People are paying more into their mortgages and seeing the cost-of-living pressures – it’s all tied together.”

Smith said results out of the retail sector to date had been “surprisingly strong” and retailers could potentially do well over the next year.

An improved currency exchange rate would also help importers – as would supply chain issues starting to ease.

“As the year progresses, and more and more people come off the lower mortgage rate, is when I think you'll get a real idea,” Smith said.

“The other key thing will be what the Reserve Bank does and if we see those inflationary pressures moderate.”