With the recent earnings results season mostly passed, we can get a better view of where retail shoppers are spending their money, and what is driving their demand.
The everyday retail that we all think about is commonly food and apparel. Both Wesfarmers (ASX: WES), the operator of Coles, and Woolworths (ASX: WOW) saw earnings growth, and achieved roughly the same profit margins as in recent past years. These are classic defensive stocks, as people still have to eat regardless of the weak economy.
Yet the earnings have not come cheap or easy since the grocers have put pressure on their suppliers to reduce their margins, leading to news stories of growers and dairy farmers being pushed to their limits if they want to remain suppliers.
The two grocery giants have had to look over their shoulders, too, with companies like Costco (NASDAQ: COST) and Aldi increasing their store numbers in capital city areas. More and more, the duopoly of grocery shopping is being chipped away as more overseas companies see the growth prospects in Australia.
Home electronics and appliances were more of a mixed bag. JB Hi-Fi (ASX: JBH) saw increased sales, and profits were up 11.22%, revitalising it after several years of flat earnings. Harvey Norman (ASX: HVN), on the other hand, has slipped farther down in both categories since it also retails furniture and household items that need a push from a strong housing market to get things going. Another factor affecting profits is the weakening Aussie dollar, which raises the cost of import goods that these two companies depend heavily upon.
Where we have seen two examples of strong retail sales are in automotive parts and accessories. Super Retail Group (ASX: SUL), operator of Supercheap Auto and BCF, has continued its steady earnings climb unstopped since 2005. It has a less crowded market to expand into, and caters to cars and outdoor activity enthusiasts, who seem to always find extra cash to buy what they love. Similarly, ARB Corporation (ASX: ARP), well known for catering to off-road vehicles and trucks, has maintained its attractive 14% approximate profit margins upon higher earnings.
The old saying “all ships rise with the tide” describes how many industries can rise and be buoyant when the market is strong, even if particular industries are not so strong themselves. The Australian economy isn’t there quite yet, so investors have to uphold their investing goals to look for stable and steady earners in industries where high barriers to entry insulate them from overheated competition. Shrinking profit margins indicate trouble despite growing revenues.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.