The future could be tough for S&P/ASX 300 Index (ASX: XKO) retail shares. Morgan Stanley has reportedly warned Australia's retail sector could face similar headwinds to those recently impacting US retail giants.
That could be dire for ASX 300 retail shares such as Nick Scali Limited (ASX: NCK), JB Hi-Fi Limited (ASX: JBH), City Chic Collective Ltd (ASX: CCX), and Eagers Automotive Ltd (ASX: APE).
Let's take a closer look at why the financial services provider is reportedly wary of the retail sector.
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Are ASX 300 retail shares about to face headwinds?
ASX 300 retail shares beware. Morgan Stanley warns Australia's retail sector may face the same consumer trends that recently dinted some US retail monoliths.
Target Corporation (NYSE: TGT)'s stock tumbled nearly 25% on the back of a trading update last week. Within the release, the company announced fewer sales had forced it to discount merchandise to clear inventory.
That, and a similar story over at Walmart Inc (NYSE: WMT), helped spark a sell-off among US-listed retail shares.
And Morgan Stanley equity strategists believe such happenings could soon make it to Aussie shores, according to The Australian.
"US retail experience around wallet shift, cost pressures, and inventory overbuild raise questions for our market," Morgan Stanley equity strategists, led by Chris Nicol, were quoted by the publication as saying.
They said US retailers were caught off guard as consumers moved away from durables and towards consumables due to rising inflation. That came alongside higher fuel prices, leading to greater costs for retailers.
"These effects are also building in Australia and are arguably not reflected in consensus sales and earnings estimates that in aggregate have only seen positive revision momentum during Covid boosts and reopening benefits."
One red flag for Morgan Stanley is ASX 300 retail shares building up inventories due to supply chain challenges. This could backfire and lead to discounting.
City Chic was among the retailers deliberately bolstering its inventory last half. It was doing so in an attempt to ward off stock shortages during key sales periods.
Australia's 13.6% savings rate will likely protect the sector for now. But Morgan Stanley is reportedly wary it might not translate to greater spending.
[M]uch of this savings drawdown is centred in recovering services categories, as well as absorbing headwinds from rising costs of living and higher interest rates.
Should consumers hedge future impact with caution in other categories this would also inhibit the level and pace of the ultimate drawdown in savings – with discretionary goods most vulnerable to spending adjustment.
