The tide may have turned for struggling Australian retailers with Black Friday and Cyber Monday sales delivering promising results. Consumer confidence is edging upwards as the housing recovery gathers force, potentially spurring an uplift in spending.
Black Friday and Cyber Monday
The National Retail Association predicted spending of $5 billion across the Black Friday to Cyber Monday period, with Black Friday expected to be the busiest day of the year for online sales in Australia. According to the Australian Financial Review (AFR), Amazon and Kogan.com Ltd (ASX: KGN) broke sales records over the 4-day sale period. Spending also rose more than 4 times faster than predicted at eBay, which had been expecting double digit sales growth.
Bricks-and-mortar retailers also experienced a strong uplift in traffic. As reported in the AFR, foot traffic at Chadstone Shopping Centre in Victoria was up 24% on Friday and 8% over the weekend. Traffic at DFO South Wharf in Melbourne was up 32% on Friday, 22% on Saturday, and 11% on Sunday.
Consumers are increasingly taking advantage of events such as Black Friday and Cyber Monday to take care of Christmas shopping. While boosting sales on these dates, this risks diluting the sales uplift traditionally observed during the Christmas period. Consumers buy now, at lower margins, at the expense of higher margin sales later.
Nonetheless, retailers will be hoping the 96-hour sale period marks a turning point for Australian retail. Retail sales declined 0.1% in 3Q19, down from 0.1% growth in the June quarter and below the long term average of 0.47% growth. Sales have been sluggish throughout the year due to constrained wage growth and lowered discretionary spending.
Tax and interest rate cuts that took effect through the year have been used to pay down debt, failing to provide much in the way of stimulus. According to the AFR, credit card balances have fallen 6% or $600 million since June. This may, however, have the effect of adding to capacity for when consumers are ready to increase discretionary spending.
Retailers will be optimistic that the momentum generated last weekend will continue through the rest of 2019 and beyond.
Here are 2 ASX shares that stand to benefit from the breaking of the retail drought.
Kogan.com Ltd
The Kogan share price has doubled over the course of 2019, up from $3.49 in January to $7.24 currently. Kogan has grown from an online electronic retailer to encompass internet, mobile, insurance, lending, and travel offerings.
Gross sales increased 12% in FY19 to $551.8 million. Earnings before interest tax depreciation and amortisation (EBITDA) were up 15.6% to $30.1 million, and net profits after tax (NPAT) were up 21.9% to $17.2 million. Dividends of 14.3 cents per share were paid, fully franked, an increase of 10% over the previous year. Kogan had a strong balance sheet at the end of FY19 with $27.5 million in cash and an undrawn debt facility of $30 million.
In FY19, Kogan introduced Kogan Money Home Loans and Kogan Cars, continuing the company's partnership strategy with industry leaders. Kogan Marketplace was also launched, which is expected to prove transformational for the business. Kogan Marketplace is an online marketplace that allows brands to list products on Kogan. Marketplace will allow Kogan to move to a more capital light model, as a greater proportion of gross sales are not reliant on inventory.
Unaudited gross sales were up 16% between July and September and 18.5% in October, with strong performances from Exclusive Brands and Kogan Marketplace. Exclusive brands is Kogan's suite of private label brands, which grew 35% in 1QFY20 compared to the prior corresponding period. Kogan Marketplace achieved gross sales of $9 million in October 2019.
Gross profit increased by 28.1% between July and September 2019, and by 22.9% in October 2019. Operating costs declined 8.6% in October 2019 due to a decrease in marketing costs, attributable to efficiencies gained with the operation of Kogan's new proprietary marketing platform. Variable costs have increased following the expansion of Kogan's logistics footprint (with the expansion to 13 distribution centres) and increase in inventory, but year-on-year decreased in October.
Kogan launched Kogan Mobile NZ, Kogan Money Super, and Kogan Energy in 1QFY20 and plans to launch Kogan Money Credit Cards in 2QFY20, complementing the existing portfolio of businesses.
Kogan had a price-to-earnings (P/E) ratio of 40 and a dividend yield of 1.98% at the time of writing.
Adairs Ltd (ASX: ADH)
Adairs shares have traded mainly sideways this year, but stormed higher this week. The share price moved up 21.3% from $1.78 to $2.16 in a day following the announcement of the acquisition of Mocka, an online home and living products designer and retailer.
The acquisition represents a complementary fit for home furnishings retailer Adairs. Online sales are a material contributor to Adairs underlying profit. The company had a medium-term target of achieving $100 million in online sales, which will be achieved via the acquisition. Pre-acquisition, online sales contributed $58.8 million, or 17%, to sales.
Total consideration payable for Mocka is expected to be approximately $85–91 million consisting of an upfront payment of $43.4 million in cash and $5.7 million in shares, plus variable deferred payments. The purchase will be funded through an increase in Adairs Group term debt facility to $90 million and a placement of $3.2 million shares to the vendors at $1.80 per share.
Mocka will operate independent of Adairs with existing management continuing to run the business. The acquisition is expected to deliver pro forma earnings per share accretion of 10% in FY20 and increase online revenue to 29% of total revenue. Adairs dividend payout ratio of 60–85% of NPAT remains unchanged.
In FY20 Adairs expects to deliver sales of $385 – $400 million and earnings before interest and tax of $48 – $52 million. In FY19, pre-Mocka acquisition, Adairs made sales of $344.4 million, an increase of 9.7% on FY18, despite challenging conditions. Gross profit increased 6.7% to $197.1 million.
EBITDA decreased 0.4% to $51.1 million. NPAT declined 1.3% to $29.6 million with results impacted by higher distribution costs and the weaker Australian dollar. Total dividends of 14.5 cents per share were paid in FY19, up 7.4% on FY18.
Foolish takeaway
Retailers will be hoping consumer sentiment has shifted with the Black Friday and Cyber Monday shopping binge. As the Christmas spending season moves into high gear, retailers will be seeking a return to form from customers who have been hesitant to spend throughout the year.
