ASX retail stocks are on a horror run for good reason
Sharemarket traders are positioning for a steep downturn across the Australian economy as small-cap retail companies skewed towards middle and low-income earners get dumped in anticipation of a rough 12 months ahead.
The alarm bells rang louder on Wednesday, after ASX-listed budget-fashion bellwether Universal Stores said shoppers cut their spending in April and May as cost of living increases – including rents and food prices – hurt young shoppers.
Foot Locker has pushed into Australia but posted a weak trading update for the March quarter.
The gloom broadened on May 16 after ANZ-Roy Morgan’s weekly survey showed Australian consumer confidence fell to its lowest level since the peak of the pandemic shock in April 2020.
A record 56 per cent of families surveyed last week said they felt financially worse off than this time last year, with 37 per cent planning for “bad” economic times over the next 12 months. Overall, confidence levels were equivalent to those last recorded in the 1990-91 recession.
The survey spooked investors who started selling retail stocks before Universal Stores confirmed their suspicions on Wednesday.
Shares in the retailer of brands such as Birkenstock, Wrangler, Thrills, and Dickies fell 11 per cent in five trading sessions from May 15, before its profit warning sparked a further 23.9 per cent slide.
On Thursday, broker Citi slashed its earnings per share forecasts for Universal by 23 per cent for financial year 2023 and 24 per cent for FY2024.
It also lopped the retailer’s valuation by 42 per cent and warned that other retail stocks faced a broad de-rating as analysts valued them on lower profit multiples and higher discount rates given the increased uncertainty around future cash flows.
Foot Locker wobbles
In the US last Friday, shares in footwear and activewear giant Foot Locker plunged 27.2 per cent in a single trading session after it reported same-store sales fell 9.1 per cent in the March quarter, with total revenue down 11.4 per cent.
The share price fall was exaggerated as Foot Locker posted a strong final quarter for 2022, before a dramatic reversal in the first quarter of this year.
Some of the reversal could be linked to the rise in the US cash rate, which at 5.25 per cent is now higher than inflation at 4.9 per cent. This means financial conditions are now restrictive and the current value of money is worth more than future cash flows.
In Australia, March quarter inflation at 7 per cent remains well ahead of the cash rate at 3.85 per cent, which means financial conditions are still relatively loose, with room to turn restrictive.
The worries about higher discount rates, tighter monetary policy, rising living costs, and Foot Locker’s shocker are fuelling the sell-off elsewhere.
Shares in footwear and fast-fashion operator Accent Group are down 20 per cent over just five trading sessions and discount jewellery group and retail darling Lovisa dropped 4.8 per cent on Thursday to take its total loss over the past five trading sessions to 16.5 per cent.
Elsewhere, City Chic, Nick Scali, Michael Hill and Baby Bunting are all down this month as investors brace for poor trading updates.
Friday could bring more volatility as retail sales data for the previous month is expected to extend an accelerating downturn.
Subscribe to gift this article
Gift 5 articles to anyone you choose each month when you subscribe.
Subscribe nowAlready a subscriber?
Introducing your Newsfeed
Follow the topics, people and companies that matter to you.
Find out moreRead More
Latest In Equity markets
Fetching latest articles