Stores selling white goods and furniture should be suffering. But they aren’t. The conventional wisdom is that after the COVID blahs, people are looking for experiences and not things. Consumer discretionary items will usually be deferred in the face of high prices. But the headwinds did not stand in the way for the discretionary sector to bounce back in the past month, helped by strong sales data from some of the heavyweights.
This rally came on the back of a 11.41% decline in the consumer discretionary benchmark index (ASX: XDJ) since the start of the year. The index is also up for the month overall, having increased 13.4% since mid-July, as the whole sector gained 7.72% in the last month.
Two narratives have led the rally in the space: normalisation of price after a soft June and strong company-related updates in the sector. Last month, Kogan, Myer, and JB HI-FI all showed strong sales figures.
The online e-commerce retailer delivered a 0.1 per cent uplift in gross sales last financial year, compared with a sales bump between 16.5 per cent to 17.3 per cent for department store Myer in the past six months. Australian white goods and technology retailer JB HI-FI issued a trading update revealing Australian sales increased 10.9% in 3Q14.
These were robust sales growth figures posted by these companies, and they all occurred at a time of high inflation and high interest rates.
As to whether she asks if intervention might bring forward risk, she responded in part: "The fact that households have saved quite a lot of money during the course of the pandemic, to the tune of something like $260 billion to date," in a speech last month.
Bullock also referenced figures that showed more than a third of variable-rate borrowers have been paying an average monthly repayment of the equivalent of what it would now take to be able to service their loan if the cash rate were pushed up to 3%.
Faul also wonders whether the strong sales growth reported by companies is too good to be true, given that despite healthy consumer demand for goods, who’s spending out money at the mall, sales growth depends too much on the held spread increase by the companies on their goods they’re selling.
“We don’t know how much of those solid sales numbers is price inflation versus volume,” he notes.
Australia/US contrast
The US consumer cyclicals sector tells a different tale from Australia. History tells us that retail sales are a fast hitter when it comes to Fed rate hikes. Sales of clothing and clothing accessories at retail are down 1.54%, as of April. American sales at retail stores and food servers shrank for the first time this year, 0.13% in May after a 6% gain from December 2021.
In the US, the inventory to sales ratio also trended up, by 4.35% since January this year as consumer demand diminishes and retailers are unable to move current stock.
American multinational retail corporation Walmart disclosed a 33.4 percent rise in inventory for the first quarter of this fiscal year that it attributed to the increased cost of goods brought on by inflation.
Where to from here?
The slump in US consumer sentiment is a tell of what could come here.
Australian consumers are still more interest rate sensitive than Americans due to different mortgage practices, with most Australians on variable rate loans.
Consumer demand is expected to soften as the RBA begins to hike and repayments on mortgages rise, according to AMP economist Shane Oliver.
“The inflationary squeeze in that area will also start piling up and consumers under interest rate hikes and extremely elevated cost of living will start pulling back from discretionary buying,” he says.
“I think the consumer discretionary stocks are going to continue to be a little bit harder for the time being, at least for the next two, three, or four months,” he added.
The perspective on the disappearance of discretionary consumer spending going forward is also a view of Faul’s.
“We are poised for a good end to fiscal 2022 for retailers. But then going forward into fiscal 2023, we will see what happens in the US.”
Faul said that food inflation would hit consumers and high mortgage repayments would mean less household savings overall and therefore a weakening in the sector.
Johannes Faul, Director of Equity Research seemed to be of the opinion that consumer spending is holding up despite the RBA's attempt to cool the Australian economy.
“Some people are going to be pulling back [on spending] while others are out there spending like drunken sailors, except on average everybody’s spending like drunken sailors,” he says.
Faul thinks that all-time high household savings have enabled Australian consumers to keep on spending in a rising interest rate landscape. In 2020, the saving ratio of the Australian household sector rose from 9.7 per cent in March to 23.7 per cent in the June quarter.
