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Trading Diary – 19 May 2020
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Investors in the retail sector have been on quite a ride over the last few months. The uncertainty regarding how the industry will be affected by the Pandemic has driven wild gyrations in stock prices.
Stock prices are primarily about narrative and how this drives investors expectations. Below we’ve looked at some of the listed retail leaders. The table shows our estimates of market expectations for revenue growth and margins baked into current stock prices.
Price Implied Expectations
* Assumes 5 years of growth and target margin achieved in 2024. Source S&P Capital IQ and SANEQ.
Premier Investments (PMV)
Price implied expectations are for revenue to decline by 12.5% during 2020 before returning to growth in 2021. The market expects margins to fall to under 11%. The company was able to achieve margins of more than 13% in the period before COVID.
The market expects the company to achieve growth of ~8% p.a. and margins to grow to 14% from 2021 onwards.
The primary growth driver in the PMV portfolio is Smiggle. The brand achieved record sales in FY19 of $306.5 million. PMV is targeting to deliver $450 million in annual global Smiggle retail sales in calendar 2021 or calendar 2022. This target might be delayed by the Pandemic.
The Peter Alexander brand also has the potential to deliver significant growth going forward. The brand has the potential to open a further 20-30 stores over the next two years, adding to the already 137 stores in the portfolio. Peter Alexander is PMV’s second-largest brand with sales during FY19 of $248 million.
Together these two brands account for 50% of PMV’s total retail sales revenue. The other brands are more mature and don’t have the global potential of Smiggle and Peter Alexander.
The Pandemic has thrown a spanner in the works for PMV’s global growth ambitions. Currently, only around 16% of the company’s revenue is from overseas. Australian retail will likely recover faster than the rest of the world. However, the company is still exposed to a weaker local consumer, reduced sales in tourist locations and from international students. These, along with the slowed global rollout, makes the company vulnerable to downward expectation revisions in the short-medium term.
The stock is now back into its long-term trading range, where it has traded sideways since March 2016. It’s unlikely that the stock will enter a new uptrend until the market can recalibrate earnings and growth expectations in a positive direction for the next few years with a higher level of certainty.
Super Retail (SUL)
SUL is priced for slower growth than some of the others we are looking at here. SUL is a relatively mature business with stable margins and returns. The market is expecting sales to drop 2% in 2020 and then to grow 5% p.a. after that.
Margins are expected to remain relatively stable, around 8% and then to expand slightly to 8.5% as sales recover.
SUL suffered from the drought and fires during its peak sales periods in H1, with sales mostly flat and EBIT declining during the period. The company announced that sales during the Pandemic have held up well, especially in its two largest brands, Rebel and Supercheap Auto. However, the outlook for sales remains highly uncertain.
Unless SUL can fire up sales and profitability growth in its smaller BCF and Macpac brands, there is unlikely to be any scope for significant positive expectations revisions. The stock has been moving sideways in a trading range since 2015. It fell below long-term support during March 2020 but is now back up in the trading range.
Lovisa (LOV)
The stock fell 84% from its high in October 2019 to the low in March. It’s now up more than 200% since March 24 – still more than 40% off its high. The stock has traded in an extensive range since June 2018. During this period, sales have continued to grow strongly, while profitability has flatlined due to margin compression. Margins fell as a result of increased costs associated with the global store rollout.
Lovisa is interesting because they have almost no e-commerce capabilities and the majority of their growth is coming from international, mainly Europe and the USA. International revenue accounts for 45% of total sales. In FY19 the company opened 14 stores in the UK, six in France, four in Spain, and 18 in the USA. This global store rollout program accounts for a large portion of the company sales growth.
The current stock price implies that the market is expecting sales to fall 5% in 2020, with margins falling from 21% to ~14%. The market then expects growth to reaccelerate back to 18% p.a., with margins recovering back to 20% over the next few years.
That is a lot of implied growth, especially coming from markets that are currently experiencing severe economic contractions. While these markets remain a significant long-term opportunity for the company, it’s hard not to see significant disruption to these plans as a result of the Pandemic.
The market will need to continue looking through the next year or two and maintain the faith in the long-term opportunity for growth for the stock to hold at these levels. There’s still a lot of growth priced. And considering this growth is reliant on the health of the global consumer when the world emerges from the Pandemic, there’s still much uncertainty.
Accent Group (AX1)
Accents stock price has also traded sideways in a range since early 2018. The March panic took the stock down through the support level that defined the trading range. However, since the March 24 low, it has fought its way back up into the bottom of the range.
The implication from this is that the company’s long-term prospects have not changed as a result of the Pandemic.
AX1 was threatening to enter a new uptrend, having jumped across the creek in late 2019. However the breakout did not hold as news of the spread of the virus came to light in late February, literally days after releasing a robust set of H1 results. The company outlined multiple avenues to growth, including new stores and digital as well as the rollout of new store concepts.
The current price implies 11% decline in sales during 2020 with operating margin declining to ~8.5% from 10% in FY19. The expectation is that growth will resume in 2021 at 12% p.a. and margins will improve to 10.5% over the next few years.
A lot is riding on the health of the Australian consumer and their ability to continue buying shoes at the same rate as they did pre-pandemic. There is much uncertainty as to whether or not this will be the case. However, for the time being, the market seems to be looking through next year’s earnings and operating on the assumption that the long-term growth opportunity remains intact, albeit with much less certainty as in late February.
Baby Bunting (BBN)
Baby Bunting is another Australia only retailer whose outlook is probably not as clouded as the international growers. The market is expecting sales growth to slow to 4% during 2020, with margins continuing to grow to 8% over time. The current share price implied expectation is that sales growth will recover quickly to 12% p.a. by 2021 as the store rollout continues and same-store sales growth resumes.
The company has articulated its growth strategy, which includes increasing store numbers from 56 currently to 80 over time, digital growth and margin improvement. The current share price implies the achievement of these objectives over the next few years, albeit with a brief setback in 2020.
The BBN stock price has traded sideways since listing in late 2015. The growth narrative has not changed over time, and therefore, for the most part, neither have expectations.
Banks, consumer discretionary and tech traded in tandem into the March 23 low. However, since that time, consumer and especially tech have bounced substantially, while banks have barely moved. I’m looking at these three sectors together because together they represent the more cyclical exposures in the market. These are the companies most exposed to the health of the underlying economy.
So what’s happening under the hood and what is the reason for the divergence?
Banks
Looking at the banks, the big four, in particular, have suffered severe drawdowns during March and hardly recovered at all during April. NAB, WBC and ANZ are all languishing very close to their GFC lows, which is extraordinary. They’ve all essentially traded sideways for the last ten years. CBA, on the other hand, was able to put in a much more robust recovery out of the GFC but has also broken below a long term trading range and is currently sitting at levels last seen in 2010.
At the GFC low, the big four banks traded at around one times book value. This multiple was down from extravagant levels before the GFC of between 2.5 and 4 times book value. They then made their way back to the 2-3x level at their post-GFC highs in 2015. WBC, ANZ and NAB have now crashed to between 0.7-0.8 times book value. CBA has collapsed to a low of 1.24x.
From this, I can only surmise that the market is expecting significant damage to bank balance sheets and profitability in the coming months.
Consumer Discretionary
Consumer discretionary stocks fell in tandem with the banking stocks at the onset of the current crisis, however, rebounded much more strongly in April. This action is in contrast to how they behaved during the GFC, where there was significant underperformance from the consumer sector. The banks also recovered faster coming out of the GFC.
Taking a look at some of the big caps in the sector:
And some of the smaller caps:
Both groups have shown strong bounces in April in contrast with the banking stocks.
Information Technology
Technology stocks also fell in tandem with the banking and consumer discretionary sectors, however, recovered a large portion of the decline in April. By the end of April, the sector average was down only approximately 8%, after having been down 42% when it bottomed out on March 23.
The strength of the bounce in technology stocks is not as surprising as the strength in the retailers. This behaviour is more in line with historical precedent. However, we are wary of discounting big techs exposure to the consumer, small business and the economy in general. These companies will struggle alongside everyone else in the event of a significant economic contraction.
The top five largest technology stocks by market capitalisation, which account for more than half of the entire technology index include Xero, Afterpay, Computershare, Wisetech and Altium. Each has exposure to the underlying economy, and each will find growth harder to come by in the event of a system-wide contraction.
Xero’s stock price has recovered to within 15% of 52-week highs. Afterpay is flirting with new highs today, following news of Tencent’s new 5% stake in the company. Neither of these companies will be immune in the event of a recession.
Xero’s customers are the small businesses most exposed to this crisis. Volume growth in Afterpays consumer payments business is sure to slow in the event of a recession, not to mention the potential credit exposure from customers who’ve lost jobs and are unable to make repayments.
Summing up
This piece is not a prediction of the future. I’m merely pointing out the growing divergence between the banking stocks and some of the other cyclically exposed stocks.
The banks are telling one story, while the consumer discretionary and technology stocks are saying something else entirely. Both have exposure to similar risks in varying degrees.
The banks have told us more. ANZ, NAB and WBC have each reported half-yearly results in the last week or two. Each set of results included hefty credit impairment charges and a deep sense of concern for what to expect in the months ahead. This concern is being reflected in their share prices, while other cyclically exposed stocks are currently reflecting hope.
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Trading Diary – 4 March 2020
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