Retail stocks are bracing for a rough earnings season as latest national spending data confirms pessimistic consumers are cutting their spending on clothing and home goods to counter surging costs for essentials.
Household spending data released by the Australian Bureau of Statistics on Tuesday revealed discretionary spending was 0.6 per cent lower compared to May 2022, with furnishings and household equipment spending sliding by 4.8 per cent for the year, while clothing and footwear dropped by 3.4 per cent.
While household spending overall was up by 3.3 per cent, consumers are saving their dollars for essential categories like health, food and transportation. The Australian economy continues to grapple with sustained inflation across a range of categories, with ABS data showing food prices tracking at 8 per cent in the March quarter, health up by 5.3 per cent and transport costs increasing by 4.3 per cent.
The latest figures have deepened the pessimism of retail analysts and experts about spending outlook.
Australian Retailers Association chief executive Paul Zahra said while the spending slowdown had happened gradually, it was clear that many households had snapped their wallets shut in discretionary categories and are instead focused on essentials such as groceries.
“I have seen this trend before, and it happens in this order: households stop shopping for their home first, then they stop spending on themselves, then they start focusing on essentials,” he said.
The Reserve Bank of Australia offered some relief to households last week when it kept the cash rate steady at 4.1 per cent, but a slew of consumer confidence data on Tuesday did not show that decision had boosted consumers’ moods.
The Westpac-Melbourne Institute Consumer Sentiment Index rose by 2.7 per cent for July, but Westpac chief economist Bill Evans noted on Tuesday that consumers’ outlook was actually more buoyant before the July rates decision. “The RBA’s decision to pause in July does not appear to have resonated with consumers,” he said.
Meanwhile, CommBank Household Spending Intentions data released on Tuesday showed consumers had plans to cut back on spending on health, entertainment and travel. The bank found overall retail spending intentions were down 0.6 per cent in June, while plans to spend on travel were down 2.5 per cent for the month, or 7.9 per cent for the year.
Equities analysts have already started to anticipate a tough company earnings season for the retail sector in August, with expectations that brands selling fashion, consumer electronics and home goods will reveal that conditions continue to soften.
UBS analysts issued earnings downgrades for a range of discretionary retailers last month, moving Smiggle operator Premier Investments and Rebel owner Super Retail Group to “sell” ratings, and lowering its earnings expectations for Harvey Norman, JB Hi-Fi, Lovisa and Universal Store.
“In addition to avoiding big ticket retailers [like Harvey Norman], we also avoid retailers that sell to middle Australia or that have been beneficiaries of a more exuberant consumer during COVID,” UBS analysts said in a note to clients.
National Australia Bank’s monthly business survey for June released on Tuesday showed that business conditions steadied in June and remained at above long-term average levels, while the bank’s measure of business confidence bounced by three points.
However, the numbers also showed continued rising costs for operators, with labour costs growing at 2.6 per cent for the quarter, while purchase costs were up by 2.3 per cent.
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Source: Thanks smh.com