A Merry Christmas For Retailers?
Since the global financial crisis, retailers in Australia and New Zealand have performed poorly due to lower discretionary spending, high AUD & NZD and poor business models. However, retail sales in Australia for the month of October were stronger than expected at +0.5% and this data carries on a recent trend of stronger domestic economic numbers. One of ’s top thematics “Spending Spree” is strongly positioned to benefit from a bounce back in retail trade. Are the interest rate cuts from the Reserve Bank finally taking effect? investigates.
Is Retail Sales Finally Picking Up?
Retail sales came in at the highest level on record in October, rising 0.5% to $24.66 billion and is likely to provide some positive momentum heading into the key Christmas period. However, it has not been easy over the past 8 years as retailers felt the pinch from the global financial crisis. Households cut discretionary spending in order to save costs and as a result growth in retail spend have been sub-par with many retailers going out of business.
A high AUD and NZD has added to the sector’s problems, as a high domestic currency
has increased the attractiveness for consumers to shop online offshore as opposed to
instore.
However, things appear to be changing. The Reserve Bank has slashed its cash rate to
a record low of 2% in May 2015 and believes that the positive benefits are beginning to feed through into the wider economy.
“We are starting to see green shoots in sectors that directly benefit from lower interest
rates. Retail is one of those key sectors as lower rates directly translates to more money
in the pocket of consumers. Retail sales have now added 0.4% or more for three consecutive months and it appears to be the start of a larger trend.” Said strategist Bradley Waller. With interest rates at record lows, households are saving money on their mortgages.
This leaves them with more money to spend on discretionary items and it appears to be providing a material boost to retail sales. Retail is also likely benefiting from a fall in the AUD. It is making domestic retailers relatively more competitive compared to shopping online. Online sales have been a
major headwind for the sector over the past 5 years with domestic consumers finding
prices online from offshore retailers more competitive. However, this is unlikely to be
the case going forward as the AUD is likely to stay low for sometime given Australia’s
low interest rate environment.
The chart above illustrates the initial stages of a broader retail based recovery. Annual
sales growth rates have stabilised at between 3-4%. expects to see further upside
to these numbers as the economy continues to benefit from the low interest rate environment.
Drilling down into the numbers a step further, we see that department stores were a
big gainer on the month, up 3.5%. The graph below of department store sales is clearly
showing some positive signs of growth and is up almost 5% over the past 5 years. This
bodes well for retailers such as Myer. currently holds Myer in its Australian portfolio, and is up 28% since adding it to its holdings in October. believes that the stock has underperformed in the past because it was experiencing little to no sales growth. It has undergone a major business restructure and is now well placed to capture the improvement in retail sales.
As always the Christmas period is key for retailers. Initial signs appear to be positive
with strong momentum going into the festive season. remains positive on the
sector and will be watching to see if the trend continues.
