The ASX retail share sector is coming under increasing scrutiny as inflation ramps up and households start to feel the bite.
There are various diverse retailers on the ASX, such as Wesfarmers Ltd (ASX: WES), JB Hi-Fi Limited (ASX: JBH), Universal Store Holdings Ltd (ASX: UNI), Adairs Ltd (ASX: ADH), Nick Scali Limited (ASX: NCK), Temple & Webster Group Ltd (ASX: TPW), Kogan.com Ltd (ASX: KGN), Premier Investments Limited (ASX: PMV), and City Chic Collective Ltd (ASX: CCX).
However, all are exposed to how much Australian consumers are deciding to spend at their stores and on their websites.
Recent analysis from AMP Limited (ASX: AMP), looking at Australian Bureau of Statistics (ABS) data, shows Australian retail spending growth slowed in June to just 0.2% for the month. AMP's expectations were for a 0.3% lift. The figure also missed consensus forecasts for growth of 0.5%.
However, AMP noted that annual growth in retail spending still remains high at 12%, though that reflects strong spending in previous months, especially in late 2021 and early 2022.
AMP said that annual retail spending is expected to slow from here as it weakens compared to high levels over 2021 and 2022. A pullback to the long-term trend growth rate was "inevitable", it said, especially as interest rates increase.
Why is retail spending slowing?
AMP named five factors contributing to slowing growth that could impact many ASX retail shares.
First, interest rate hikes could be a factor. The June data reflects two interest rate hikes totalling 0.75% from the Reserve Bank of Australia — a 0.25% rise in May and a 0.5% increase in June.
Next, strong retail spending over the past two years brought forward demand.
Third, consumers are spending money on services rather than retail goods as the economy and borders have opened up.
AMP also noted "poor consumer sentiment". According to a Westpac Banking Corp (ASX: WBC) and Melbourne Institute survey, consumer confidence is at "recession-like levels".
Finally, a high level of inflation is leading to a fall in consumer purchasing power.
What next?
AMP suggests that the above factors will persist in the coming months. In turn, this means more potential downside for consumer spending, affecting ASX retail shares.
It said retail volumes "will start to decline as spending slows and inflation is high". At last report, CPI inflation for June was 1.8%.
Recent share price performances
Movements in share prices have been mixed for businesses in recent times.
Since the beginning of 2022, many ASX retail shares have fallen heavily, yet they have recovered notable ground over the past month.
As an example, the Temple & Webster share price is down 50% this year, but up 59% in the past month (albeit from a low point).
Meantime, the Adairs share price is down 42% for the year, but up 26% in the last month.
Similarly, the Kogan share price is down almost 48% for 2022, yet up 66% over the last month.
Following the pattern, the Wesfarmers share price is down 22% this year, but it is up 11% over the past month.
Some numbers may seem dramatic, but if a share price falls from $100 to $10, it has dropped 90%. If it then goes from $10 to $15, that counts as a rise of 50%.
Investors who have been buying may be thinking the bottom of the decline was too pessimistic about the future for ASX retail shares.
