Wealth Within senior analyst Filip Tortevski describes ASX 200 retail shares as the 'shock performer' of the August earnings season.
Several high-profile retailers reported surprisingly strong results, beating the market analysts' consensus expectations.
Tortevski noted that some of those beats were due to improved margins from cost-cuts and other factors, not necessarily higher sales.
The analyst said (courtesy The Australian):
Consumer discretionary was the shock performer.
Not just because shoppers spent more, but because retailers like Coles Group Ltd (ASX: COL), Harvey Norman Holdings Ltd (ASX: HVN), and Super Retail Group Ltd (ASX: SUL) squeezed every cent through margin management, AI efficiencies, and cost cuts.
In August, ASX 200 retail shares outperformed the market benchmark S&P/ASX 200 Index (ASX: XJO).
The S&P/ASX 200 Consumer Discretionary Index (ASX: XDJ) lifted 7.4% and is up 14.4% in the year to date.
The ASX 200 increased by 2.6% in August and is up 8.7% in the year to date.
Why are ASX retail shares rising?
Tailwinds for ASX retail shares today include falling interest rates, a retail sales surge, and rebounding household spending.
In a new note, Macquarie said the consumer discretionary sector had a strong earnings season.
The sector's average outperformance above analysts' expectations was +2.9% with net positive earnings per share (EPS) surprises of +25%.
Macquarie said the Australian consumer was resilient and looking for value:
Australia's real consumer spending continues to accelerate, supporting growth in consumer stocks.
Macquarie commented that shoppers are "getting their mojo back" amid lower inflation, wage rises, and interest rate cuts.
The broker said:
RBA rate cuts have historically led to stronger spending, and so we should expect real consumer spending to continue to accelerate.
+3% real growth does not seem unreasonable.
The strong growth in real household incomes should support higher spending.
This real income growth is driven by a combination of nominal income growth, lower inflation and tax cuts.
What are ASX retailers saying?
Shopping centre owner Vicinity Centres (ASX: VCX) reported a near doubling of its statutory net profit after tax (NPAT) for FY25.
The FY25 net profit was $1 billion, up from $547.1 million in FY24.
The Vicinity Centres share price lifted to a five-year high of $2.63 the day after the report was released.
The mall operator said:
FY25 has proven to be a resilient year in terms of retail sales growth, benefiting from the confluence of population growth, strong employment, the accumulated benefit of income tax reductions effective 1 July 2024, Federal Government initiatives to reduce the cost of living throughout FY25 (e.g., energy cost rebates), as well as two interest rate reductions and the likelihood of further interest rate reductions in 2025.
Coles shares lifted 8.5% on results day after the supermarket reported a 4.3% lift in supermarket sales and underlying group NPAT of $1.18 billion, up 3.1%, for FY25.
The Coles share price reached an all-time high of $24.28 two days later.
Coles said:
Sales revenue was supported by solid volume growth with growth across both transactions and basket size, underpinned by our focus on value, quality, availability and the overall customer experience.
Customers responded positively to our seasonal 'Great Value, Hands Down' value campaigns, our focus on fewer, deeper promotions and our expanded range of products on everyday low prices.
CAR Group Limited (ASX: CAR) reported an 8% increase in revenue and a 10% boost to net profit for FY25.
Within six trading days of its report, Car Group shares had risen 12.5%.
Car Group commented:
The Australian automotive market has remained resilient over the past year, with strong consumer activity on carsales.
We've seen particularly strong performance in the used car market, while the new car segment has remained stable.
Traffic and enquiry volumes continue to be healthy, despite ongoing cost-of-living and interest rate pressures.
Which retail segments have the best outlook?
Australia's biggest bank, Commonwealth Bank of Australia (ASX: CBA), had this to say about the general retail outlook:
The Australian consumer has displayed caution in retail spend decisions, prioritising savings and debt repayments given uncertain global conditions.
Recent interest rate relief, tax cuts and moderation of inflation provide some support for the outlook.
Furniture and homeware businesses have the best outlook, according to Macquarie.
Temple & Webster Group Ltd (ASX: TPW) shares ripped after the online furniture company reported a 500% profit explosion for FY25.
The Temple & Webster share price hit a new record of $29.06 on results day last month.
Temple & Webster said:
With anticipated interest rate reductions, coupled with stimulatory government policies relating to housing, we remain optimistic that conditions in FY26 should be favourable for the furniture, homewares and home improvement categories.
Arguably, the most stimulatory policy supporting housing is the universal 5% first home buyer deposit scheme, which begins on 1 October.
Which segments of retail remain challenging?
Macquarie notes that some segments of the retail sector remain challenging, such as liquor markets.
Coles, which owns Liquorland and other liquor retail brands, said:
The liquor market remained subdued throughout the year with cost-of-living pressures continuing to influence customer behaviours.
ASX retail share Endeavour Group Ltd (ASX: EDV) owns Dan Murphy's and many pubs.
The company said:
Consumer spending in retail liquor remains subdued, however we expect retail liquor market conditions to improve as inflation moderates and real wages increase.
Further reading
You can view all the financial reports from key ASX retail shares here.
