Tax, rate cuts lift retail confidence

19/08/2019 - 15:25

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ANALYSIS: A recent rise in share prices for listed retailers reflects some positive signs across the economy.

Myer is expected to accelerate its reorganisation by cutting floor space in its shops. Photo: Attila Csaszar

A recent rise in share prices for listed retailers reflects some positive signs across the economy.

It has been a rough decade for traditional retailing, with economic turbulence buffeting consumer sentiment and internet shopping eating into market share.

So when a number of ASX-listed retailers recently posted sharp share-price rises it was a sign that conditions might be improving.

Although more proof is needed to be confident the retail worm has turned, after so much bad news about shops closing and staff losing their jobs, it is worth examining what’s caused the unexpected bounce.

Shares in Harvey Norman, for example, traded up to a two-year high of $4.59 last week, taking its gain to 45 per cent since early January when the electrical-goods and homewares retailer was limping along at $3.16.

Shares in Super Retail, which owns a number of specialist businesses such as Rebel Sport and Supercheap Auto, have risen by 41 per cent since the start of the year, with a gain from $6.83 to $9.74.

Specialist computer and audio appliance retailer JB Hi-Fi is up 47 per cent at $31.90, an all-time high; even Myer, a department store operator that has been on a downward spiral for the past decade, has been kicked into life with a rise of 44 per cent since February, with a share-price increase from 36 cents to 52 cents – though recent prices are down on the April peak of 74 cents.

Multiple factors are at work in retail with some, such as tax cuts and falling interest rates, likely to deliver a short-term benefit by encouraging consumers to spend. Other factors, such as the first signs of government pressure on pure-internet retailers, are encouraging shop owners to compete more vigorously.

Investment bank Citi was one of the first financial institutions to note the change in retail fundamentals in a report last month titled ‘A turning point in Australian retail’, with the key conclusion that retailers were starting to experience their best sales outlook in four years.

Citi found four factors combining to lift confidence in retail – tax cuts, interest rate cuts, declining living costs for families, and a stabilising housing market in east-coast cities. The surprise election win by the coalition in May was another trigger for the boost to retailers.

What happens next is of interest to everyone exposed to retail, from consumers to investors, and from employees to media organisations that benefit from increased advertising (see next item).

The immediate outlook is for the sugar hit to consumer spending from the tax and interest rate cuts to slowly wear off, potentially rubbing the gloss off share prices.

But it’s also likely that the past few weeks have reset the button for some retailers, which can look forward to a continuation of strong sales as consumers discover they are enjoying an increase in cash for discretionary spending.

Citi expects overall Australian retail sales to rise by 3.8 per cent in the current financial year, a big lift on the 1 per cent growth last year, as households benefit from reduced mortgage payments.

Another interest rate cut expected later this year amid easing global monetary conditions could further boost consumer retail spending, with more tax cuts to follow under the federal government’s income tax plan.

“The government has budgeted for $7.3 billion in tax cuts, which we forecast to drive a 70 basis points (0.7 per cent) boost to disposable income in the 2020 financial year,” Citi said.

“This equates to $726 per taxpayer on average, which will be delivered through the July-to-October tax return period.

“The nature and timing of the tax offsets increases the chances they are spent, which could benefit retail spending by up to 1.5 per cent during the September (current) quarter.”

It’s not all good news for retailing, however, because some consumers are likely to save their increased tax returns or take advantage of reduced interest commitments on their mortgage to increase repayments. The better trading conditions could also boost wage demands, and the threat from internet retailers will not fade as more consumers adapt to shopping online.

What the current conditions in retail represent is some breathing space for traditional shopkeepers to take stock of the difficult conditions of the past decade and plan for the future with greater confidence.

Myer, for example, is expected to accelerate its reorganisation by cutting floor space in its shops. Investment bank UBS has suggested Myer could ‘hand back’ 16 floors of space in its stores over the next three to four years as it reshapes its retail offering.

Traditional retailers have also been given a bit of extra time to improve their internet offering after learning how to operate the bricks-and-clicks business model that was recommended a few years ago but has not yet been fully embraced.

Managing media

Some parts of another industry buffeted by the internet, news media, are also showing encouraging signing of fighting back, led by on one of the oldest players in the game, the Rupert Murdoch-led News Corporation.

Rather than lament the loss of advertising dollars to electronic opponents, News Corp has been able to effectively reinvent itself as a significant player in both print and internet publishing. As a result, it has just achieved the same recognition as some retailers – a handsome share-price increase.

Since the start of the year News Corp, which has extensive US and Australian media interests, has risen by 28 per cent to $20.84 (at the time of writing), down slightly on a 12-month high of $21.60 reached last month.

Investment banks are warming to the News Corp story, despite it being led by an 88-year-old media veteran in Rupert Murdoch, with Macquarie Bank upgrading its future share price forecast for the stock to $26.46.

What Macquarie likes is the mix of businesses in News Corp, including its Australian and US newspapers, which are growing their digital subscriber base, as well as a successful digital real estate business in the US. The recovery at News Corp and its ability to mix traditional with digital could represent a path forward for the local media leader, Seven West, which has been on a downhill slide for several years, falling over the past 12 months by 65 per cent from $1.12 to 39 cents, possibly a reason for the latest management shake-up.

Lithium lag

Western Australia’s dream of creating a battery-making business to meet the needs of electric cars continues to weaken, as lithium miners scale back project development plans and lithium-price forecasts continue to weaken.

Investment bank Morgan Stanley last week described the battery metals sector as being “besieged” with the lithium price expected to settle around $US9,550 a tonne next year before easing back to $US7,220/t by the year 2025, a level that will dampen enthusiasm for the industry and severely test high-cost producers of the material.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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