Retail Spending Spree | Xero – Committed to Growth

17 November 2021

Global markets were higher overnight, with the US market (S&P 500 index +0.4%) rallying to  new highs after a strong October retail sales report and better-than-expected third-quarter results from retail giants signaled the US consumer is still ramping up spending, even in the face of rising prices.

The latest retail sales figures for October showed US consumers were increasing their spending, with sales jumping 1.7%. That compares to an 0.8% increase in the prior month. The report showed broad strength in a number of categories from autos to sporting goods, with online sales are up 10.2% from a year ago.

Home Depot was the biggest gainer in the Dow by far on Tuesday, jumping 5.7% after results topped estimates and net sales jumped 9.8% last quarter, while rival Lowe's added +4.6%. Walmart also reported third-quarter per-share earnings and revenue well above estimates, and US same-store sales jumped 9.2%, excluding fuel, However the stock fell -2.5% as supply chain issues impacted margins.

European Markets (Stoxx 600 index +0.2%) also rose to record highs fueled by strong company earnings and dovish statements from the European Central Bank chief who again pushed back against the need for tighter monetary policy.

Closer to home, Reserve Bank of Australia, Governor Phil Lowe indicated the central bank believes Australia is fairly immune to global inflation pressures and rate hikes in 2022 aren't justified, contrary with other central banking peers. However the market disagreed, sending long bond yields higher.

Xero (XRO:ASX)

Xero’s shares fell last week after delivering their 2022 half year result. 
Fortunately, since then XRO has recovered most of the loss since. Xero managed to lift operating revenue by +23% from last year to $505.7m, thanks to strong growth across all operating regions, unfortunately this result in a net loss of -$5.9m, as the company continue to prioritise growth over profit. This resulted in increased investment spend across sales and marketing, and product development– which didn’t bode well with investors, at least initially.

We remain BUY rated on Xero as first in class SaaS business and with gross margins improving will help them capitalise on their large total addressable market globally and continue to achieve high double-digit sales growth.

Australia & New Zealand Market Movers

The Australian market was down on Tuesday (ASX 200 index -0.7%), dragged down by commodity stocks.

Major iron ore miners were hit heavily with BHP(-2.6%) and Rio Tinto (-2.2%) as the price of iron ore slipped following weak property data coming out of China.  Energy stocks were also mostly weaker despite the price of crude oil lifting +0.8%, as central banks become concerned with inflation and rising costs – particularly for energy. 

Technology was the only sector in green with modest gains, Next DC led the pack up +1.8%, followed by Afterpay up +1.7%.
Mesoblast reversed Monday’s gains and fell heavily down -8.7%.

The New Zealand market was down on Tuesday (NZX 50 index,= -0.5%) as higher bond rates weighed down on the market once again.

Yield stocks were the major drag on the market such as the gentailers (Mercury -2.8%, Genesis -1.9%, and Contact down -0.4%), and Spark (-1.1%) all trading lower as their stable dividends appear relatively less attractive when interest rates go up.

A2 Milk led losses falling -2.9%, as well as Fisher and Paykel down -1.3%. Both “growth stocks” are also sensitive to a higher interest rate environment. 

Napier Port jumped +2.7% after reporting revenue rose 9% in the 2021 financial year. 

3 Things Markets will be Watching this Week

  1. Key events this week include CPI (Inflation) and employment data across the Eurozone and UK, and third quarter GDP in Europe.
  2. A raft of US housing market data is due along with retail sales and a data dump in China (retail sales, IP and fixed assets investment).
  3. Locally, CBA will release its first quarter result, AGM’s and Investor days held by  Aristocrat, Incitec Pivot, Ryman Healthcare, Afterpay, Seek, a2Milk, BlueScope Steel, Goodman Group, Resmed, Wisetech and Next DC.
Global markets were higher overnight, with the US market (S&P 500 index +0.4%) rallying to new highs after a strong October retail sales report and better-than-expected third-quarter results from retail giants signaled the US consumer is still ramping up

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