Regardless of how much an industry is struggling, there will always be companies making a decent profit. Great recent examples of this are in the airline industry, where overseas firms were still able to make a solid living even though Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) were reporting massive losses. Also, in the iron ore market where there were genuine fears for the survival of Atlas Iron Limited (ASX: AGO) even though BHP Billiton Limited (ASX: BHP) continued to rake in cash.
Consumer Discretionary
The same situation can be found in the Australian consumer discretionary market- a sector hit hard by low wage growth, poor sentiment and the general unwillingness of Australians to spend their hard-earned cash. Even now, with house prices rising strongly in Victoria and Sydney, consumer confidence remains 0.6% BELOW the long-term average, perhaps as a function of caution around how far house prices have risen.
The most recent survey by ANZ-Roy Morgan found that consumer perception pointed to Australians feeling less financially secure:
- Financial situation compared to a year ago: 103.6 (-1.8%)
- Financial situation next year: 120.8 (-1.2%)
- Economic conditions next year: 93.7 (-2.3%)
- Economic conditions next five years: 104.5 (-6.7%)
- Time to buy a major household item: 137.8 (+4.8%)
June's Q1 GDP report showed that growth in consumer spending remained weak, with subdued growth in household incomes weighing on spending. Compounding this, the total business wage bill fell 0.1% in the March quarter, the first fall since 2009, pointing again to limited spending opportunities for everyday Australians.
What's the impact on ASX Companies?
Low consumer discretionary spending has been blamed over and over again by Australia's struggling retail companies as the prime reason for falling profits. Myer Holdings Ltd (ASX: MYR), OrotonGroup Limited (ASX: ORL), Pacific Brands Limited (ASX: PBG) and Kathmandu Holdings Ltd (ASX: KMD) are all struggling to adjust, albeit mainly for reasons beyond just weak consumer spending. All four have seen share price declines of over 30% in the last 12 months.
Not all is lost!
There are a select group of retail companies that are smashing both the All Ordinaries index and also their peers. Their names, for those playing at home, are Harvey Norman Holdings Limited (ASX: HVN), Super Retail Group Ltd (ASX: SUL), Premier Investments Limited (ASX: PMV), and JB Hi-Fi Limited (ASX: JBH).
But why?
The reason is simple; these companies have a significant point of difference and are benefitting from long-term tailwinds that the others aren't. Harvey Norman, for instance, is exposed to the booming property market via not only its own high-quality property portfolio, but also because it's a one-stop shop for all those people trying to furnish their new properties.
Super Retail's sports stores are the best in the market and a lower Australian dollar makes them more competitive versus online-only competition. Similarly, the group's Ray's Outdoors and Supercheap Auto stores offer convenience for consumers that have cash to spend on holidays or hobbies.
Premier Investments is doing an excellent job targeting a niche in the Australian market that others simply can't compete with. The purchase of Peter Alexander was genius and the Smiggle stationery brand is achieving sales and store growth that surely no one expected!
JB Hi-Fi meanwhile is a little different. The group's ultra low-cost distribution network and great staff training and retainment efforts means that JB's has the most knowledgeable and therefore helpful staff, and among the lowest prices. A lower Australian dollar has helped its competitiveness but overall its massive store network and low-cost offering keeps it competitive versus peers like Dick Smith Holdings Ltd (ASX: DSH).
What does the next 12 months hold?
I, like many, expect that the sector will continue to strengthen over the next 12 months. The question for investors now is which of the struggling brands will recover and which of the strong ones will move to the next level.
My tips are Kathmandu to recover and Premier Investments, led by the brilliant Soloman Lew, to move to the next level as a result of their competitive advantages over peers.
