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ASX retail stocks facing new billion-dollar earnings scare during COVID-19 recovery

The re-rating of the ASX consumer discretionary sector is under threat from a new risk that could punch a big hole in their bottom line.

Retail stocks have been stealing the limelight as Australia emerges from the lockdown to contain the COVID-19 pandemic.

But yesterday’s Federal Court ruling on casual leave entitlements could cost employers billions of dollars if applied across the economy.

ASX stocks in the firing line

This risk is yet to be reflected in the share prices of leading ASX retailers with the sector being a big employer of causal staff.

The Premier Investments Limited (ASX: PMV) share price surged 18% over the past month, while the Breville Group Ltd (ASX: BRG) share price and JB Hi-Fi Limited (ASX: JBH) share price rallied 16% and 12%, respectively.

In contrast, the S&P/ASX 200 Index (Index:^AXJO) is trailing behind with a modest 4% gain over the same period.

Bankruptcy warning

The Federal Court decision, which upheld an earlier lower court ruling, was alarming enough for the National Retail Association (NRA) to issue a blunt warning to the Morrison government.

“Retail has one of the highest proportion of casual workers of any sector,” said NRA chief executive Dominique Lamb.

“If businesses are forced to back-pay leave entitlements to casuals who have worked regular shifts it could spell doom for many businesses and the workers they employ.”

Details of the court case

The court case relates to a casual employee hired by labour hire firm WorkPac to work at two Queensland mines owned by Glencore.

The casual staff, which isn’t entitled to paid leave and other entitlements reserved for permanent employees, was paid a 25% loading in addition to his wage.

But the courts found that the casual should be entitled to all benefits despite being paid a loading because he had “regular, certain, continuing, constant and predictable” work, reported the Australian Broadcasting Corporation.

The NRA is worried that the ruling will force all businesses who employ causal staff to be back-paid billions in entitlements.

Other ASX stocks that could be impacted

It isn’t only retailers that could suffer. There could be ramifications for fast food businesses like Domino’s Pizza Enterprises Ltd. (ASX: DMP) and Collins Foods Ltd (ASX: CKF) too.

Our supermarket giants Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) will be nervously watching this issue also.

Is it time to panic?

But it’s too early to sound the death knell for consumer-facing stocks. Not all casuals will qualify even if the decision is upheld as their work schedules and obligations have to be similar to permanent staff.

Further, there is growing pressure on Industrial Relations Minister Christian Porter to enact a new legislation solution to protect businesses.

There is also talk of another appeal from Workpac, which could set aside the Federal Court’s finding. At the very least, that could delay back payments to casuals for a few more years.

What this means is that it’s too early to price in this risks into ASX share prices, although investors better stay on their toes given what’s at stake.

Watch this space fellow Fools!

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Motley Fool contributor Brendon Lau owns shares of Breville Group Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool Australia has recommended Collins Foods Limited and Domino's Pizza Enterprises Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.