Consumer staples shares and consumer discretionary shares are 2 of the mainstays of the ASX. Below, we take a look at 2 consumer staples and 2 consumer discretionary shares, all operating in the retail sector, to understand how the sectors are performing.
First, a quick definition of consumer staples vs consumer discretionary businesses.
- Consumer staples businesses: sell essential goods such as food, hygiene, and household products. These are items that people must consume regardless of the economic climate. Consumer staples are seen as non-cyclical, with a relatively constant level of demand. As a result consumer staples shares tend to exhibit lower volatility and are more likely to pay consistent dividends.
- Consumer discretionary businesses: sell non-essential items, the kind of things people purchase if they have extra income, but do without when things are tight. For this reason demand for consumer discretionary goods is seen as more cyclical in nature, and influenced by the state of the economy. Consumer discretionary goods include durable, entertainment and leisure goods.
The retail industry as a whole has struggled over 2019. Tax and interest rate cuts have had limited effect as consumers have focused on paying down debt. Rising rental costs combined with consumers' hesitance to spend has crimped retail growth. Retail sales declined 0.1% in 3Q19, well below the long term average of 0.47% growth.
In recessionary times, consumer staples shares can serve as a safe haven to investors, while the opposite is true for consumer discretionary shares.
Consumer staples shares
Coles Group Ltd (ASX: COL) and Woolworths Ltd (ASX: WOW) are the two giants of Australia's supermarket scene, commanding 27% and 34% of the grocery market, respectively.
Coles
Coles operates more than 800 supermarkets, 900 liquor stores, and 700 fuel and convenience stores across Australia. The retailer listed in late 2018 when it split from former parent Wesfarmers, debuting at $12.49. The share price has since climbed to $15.32 and trades on a price-to-earnings (P/E) ratio of 18.92.
In FY19, Coles reported sales revenue of $38,175.8 million, an decrease of 1.9% on the previous year. While revenue for the supermarket division was up 3.2%, revenue for the Express division declined 30.6% due to a decline in fuel volumes and the move to a commission agent model under the new Alliance agreement.
Group earnings before interest and tax (EBIT) declined 0.9% to $1,466.7 million, however profit after tax increased 5.4% to $1,078.2 million. Coles Online reported 30% sales growth, generating $1.1 billion in sales and achieving profitability for the first time.
Coles reported sales of $7,705 million in its supermarkets division in 1QFY20, an increase of 1.6% over the prior corresponding period representing comparable growth of 0.1%. Liquor division sales increased 3.5% to $726 million representing comparable growth of 0.7% and the Express division recorded sales of $264 million up 3.1% representing comparable growth of 0.4%. Overall first quarter sales grew 1.8% to $8,695 million with comparable growth of 0.2%.
Woolworths
Coles' closest rival, Woolworths, lays claim to more than 3,000 stores across its supermarkets, liquor, and Big W divisions in Australia and New Zealand. Woolworths shares are currently trading at $38.44, up 30% from $29.33 in January, with a P/E multiple of 33.82.
In FY19, Woolworths recorded $59,984 million in sales, an increase in 3.4% over the previous year. EBIT increased 5.0% to $2,724 million while net profit after tax (NPAT) increased 7.2% to $1,752 million. Earning per share were up 6.8% to 134.2 cents per share.
Woolworths recorded strong results in 1QFY20, with the Australian food division recording 7.8% growth in sales. Online sales for the group were up 37.4% while the liquor division recorded growth in sales of 4.9% for the quarter. Overall group sales were up 7.1% to $15.9 billion in 1QFY20.
Consumer discretionary shares
Kogan.com Ltd (ASX: KGN) and JB Hi-Fi Limited (ASX: JBH) compete in the consumer discretionary space, with businesses built on retailing electronics and entertainment products. JB Hi Fi retails through its store network and online. Kogan has has grown from an online retailer to encompass internet, mobile, insurance, lending, and travel offers.
Kogan.com
The Kogan share price has doubled over the course of 2019, up from $3.49 in January to $7.11 currently, and trades on a P/E multiple of 39.41.
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 NPAT were up 21.9% to $17.2 million.
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. 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.
JB Hi-Fi
The JB Hi-Fi share price has increased by ~80% this year, from $20.42 in January to $37.10 currently, and trades on a P/E multiple of 17.24.
JB Hi-Fi operates the JB Hi-Fi brand in Australia and New Zealand, which focuses on technology and consumer electronics, and The Good Guys brand in Australia, which retails home appliances and consumer electronics. Total sales were up 3.5% across the group in FY19 to $7,095.3 million.
EBIT increased 6.4% to $372.8 million and NPAT increased 7.1% to 249.8 million in FY19. Earnings per share increased 7.1% to 217.4 cents per share and total dividends increased 10 cents per share to 142 cents per share.
In 1QFY20 total sales for JB Hi-Fi Australia were up 4.7% with comparable sales growth of 3.7%. Total sales for JB Hi-Fi New Zealand were up 3.8% with comparable sales growth of 3.8%. The Good Guys reported negative sales growth of 0.5% with comparable sales growth of -1.8%.
Total sales in FY20 are expected to be around $7.25 billion, consisting of $4.84 billion from JB Hi Fi Australia, $0.24 billion from JB Hi-Fi New Zealand and $2.18 billion from The Good Guys.
Foolish takeaway
While sectors can give a broad indication of performance in certain economic environments, the performance of individual shares depends largely on the underlying companies. Kogan and JB Hi-Fi have managed to outperform despite the general retail malaise, while Coles and Woolworths power ahead on the strength of their supermarkets. For a well-diversified portfolio, a mixture of consumer staples and consumer discretionary shares is advised.
