UBS is recommending that investors sell their shares in Harvey Norman but hold onto their shares in JB Hi Fi who are seen by the industry as having the better management to manage “tough times”.
The investment banks retail analyst Shaun Cousins believes consumers are set to rapidly shift their mindset as sharper cost-of-living increases impact family budgets. Also impacting retailers will be a move to increase staff wages and the cost of leasing floor space.
His recommendations are a “sell” rating on Harvey Norman, and a “neutral” rating on JB Hi-Fi, which also operates The Good Guys chain.
Harvey Norman chairman Gerry Harvey says there is no sign yet that consumer confidence is faltering according to the Financial Review.
He claims that big-ticket item categories had been winners in the first two years of the COVID-19 pandemic as households spent up on items for the home when they were unable to travel, often bringing forward purchases however this could slow with other analysts claiming that the impacts of rate rises and rising inflation will be felt more in early 2023 than 2022.
Cousins claims that investors were generally very cautious about discretionary retailers at the moment, and value investors were still on the sidelines because of the risk of more tough times.
He claims that there are difficulties ahead across the retail sector because of rising labour costs after the Fair Work Commission decision, and rising rents, with many landlords having mechanisms where rental costs were linked to the Consumer Price Index.
Inflation is rising fast, with the Reserve Bank of Australia expected to again lift official interest rates in early July as it belatedly attempts to combat it.
UBS claims that it remains to be seen whether competitors might seek to “discount aggressively” if sales begin to slow. Most retailers had higher than usual levels of inventory in warehouses because they had built a buffer of stock in the wake of severe supply chain disruptions. Retailers had generally shifted to a “just in case” approach to inventory from a “just-in-time” model prior to the pandemic.
Mr Cousins said retailers with a target market of a younger demographic were likely to do better. He said the young had fewer financial commitments and this was a likely positive for stocks.
This is seen as a plus for JB Hi Fi who have a large younger audience.
Cousins said companies such as Wesfarmers, which operates Bunnings, Kmart and Officeworks, had a “very strong value focus” and were able to leverage their scale which should put them in a solid position to withstand a consumer spending downturn.
