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These ASX 200 consumer discretionary shares are bucking the economic cycle

ASX 200 consumer discretionary shares are known to be cyclical. That is, they are companies selling non-essential products and services – things we like to have but can survive without. This sector often suffers in economic downturns. But the COVID-19 downturn appears to be different. 

Lockdown restrictions mean people are spending more leisure time at home, and frequently working from home too. This has increased demand for some typically discretionary items. Here we take a look at three consumer discretionary ASX 200 shares that are outperforming despite the downturn. 

Breville Group Ltd (ASX: BRG)

The Breville Group share price has increased more than 130% since its March low of $10.80 and is currently trading at $24.97. Breville manufactures and sells home appliances such as blenders, toasters, microwaves, and kettles. This ASX 200 share saw revenue grow strongly in March and April – climbing 14% and 18% respectively in the company’s Global segment. The Distribution segment saw revenue growth of 25% in March and 15% in April. 

Strong Australian sales 

Australia and the United Kingdom recorded strong sales in April and May. The United States and Europe lagged other regions due to store closures and the temporary shut down of Amazon Prime. A strong shift to online channels was observed, both via third party sellers and from Breville direct to consumers. Despite its strong growth, Breville moved swiftly to implement measures to reduce cash expenses with the onset of the pandemic. 

Expenses down 

Employee expenses were reduced via salary cost reductions and marketing expenses temporarily reduced by 45%. Discretionary spending has been reduced or deferred and a freeze on non-essential capex implemented. R&D investment has, however, been maintained to protect the product development pipeline. 

Earnings growth and expansion 

Breville has delivered growth in earnings before interest and tax (EBIT) since FY16, with EBIT increasing 15.6% in 1H FY20. Since FY16, Breville has been steadily expanding into new international markets. It entered Eastern Europe in FY16-17 and Germany and Austria in April 2018. In early 2019 Breville entered Belgium, the Netherlands, Luxembourg, and Switzerland, followed by Spain and Turkey later in the year. The company expanded to France and the Middle East this year and is in advanced planning for entry into further markets in FY21. 

Wesfarmers Ltd (ASX: WES)

The Wesfarmers share price has climbed steadily since its March low. It is now up 50% from a low of $31.02 and trading at $46.48. Wesfarmers is the company behind Bunnings, Officeworks, Kmart, and Target. Bunnings and Officeworks saw a serious acceleration in sales during the first lockdown as consumers set up home offices and tucked into DIY projects. 

Strong sales growth 

Bunnings saw sales growth of 19.2% in 2H FY20 to May, while Officeworks’ sales grew 27.8%. This growth was attributable to people spending more time at home as lockdowns took effect. Given the change in customer shopping patterns, it is uncertain whether this growth will continue. 

Sales momentum at Kmart and Target improved in May with a general increase in customer footfall in shopping centres. A recovery in demand for apparel, particularly winter clothing, was noted. Nonetheless, weekly sales performance remains highly variable. For Kmart, significant growth in demand for home and living ranges resulted in some availability issues which are expected to impact June sales. 

Online sales surge

Over the calendar year to early June, the ASX 200 share saw total online sales growth of 89%, reflecting the COVID-19 shift to digital. Wesfarmers has invested significantly in its eCommerce capabilities in recent years, an investment that paid off. Over the financial year to early June, total online sales across Wesfarmers’ business increased 60% to $1.4 billion, or $1.9 billion including Catch. Online bargain site Catch reported sales growth of 68.7% in the second half, and 43.7% over FY20 to early June. 

Costs also up 

Increased sales came at a cost, with Bunnings investing approximately $20 million in additional cleaning, security, and protective equipment to respond to COVID-19. Bunnings will also incur costs of approximately $70 million associated with trading restrictions in New Zealand, the accelerated roll-out of the online offering, and the closure of seven small format stores in the second half. Additional costs associated with COVID-19 and the temporary closure of New Zealand stores will also impact Kmart’s earnings in the FY20 financial year. 

Domino’s Pizza Enterprises Ltd (ASX: DMP)  

The Domino’s share price has recovered strongly from the March downturn and surpassed previous highs. Now trading at $74.05, Domino’s share price is up 37% over 2020 and 65% from its March low. Domino’s is behind the ubiquitous pizza franchise, which has seen a material shift to food delivery in its markets as customers follow stay at home orders. 

Domino’s reports takeaway orders are being replaced by orders for zero contact delivery. CEO Don Meij said, “Many have told us they are doing the right thing by staying home… Their Domino’s delivery is helping them to stay home as well as providing a welcome moment of normalcy in challenging times.” 

Store sales performance  

Same store sales remained consistent in Australia post COVID at a national level. There were, however, significant changes in individual store performances reflecting local trading conditions. This means sales growth has been distributed unevenly across the business. In New Zealand and France, stores have reopened with 1,000 additional delivery drivers sought in New Zealand in anticipation of customers opting for delivery rather than takeaway. 

Japanese and German stores have maintained their strong sales performance. Sales performance in Germany continues to lead the region, while demand has significantly increased in Japan. Japanese management is focused on ensuring operations can meet increased demand from both delivery and takeaway customers. 

Medium-term outlook 

Domino’s does not provide short-term guidance but has advised its balance sheet remains strong, with significant headroom in committed debt facilities and covenants. Over the medium term, Domino’s intention is to continue to open new stores (+7 to 9% per year), and grow same store sales (+3% to 6% per year). COVID-19 has caused some uncertainty which delayed the opening of some stores planned for FY20. Store openings in FY21 will depend on local market conditions relating to COVID-19. 

Foolish takeaway

The COVID-19 downturn is different to previous downturns because it’s accompanied by lockdowns and social distancing restrictions. These have impacted on consumer spending patterns, increasing demand for some discretionary items. These ASX 200 consumer discretionary shares are seeing the results in their sales figures. 

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool Australia has recommended 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.

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Kate O'Brien