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Retail conditions deteriorate amid inflation fears

The combination of inflation, higher interest rates and surging food and power costs has seen retailers facing a grim economic outlook.

15 June 2022 

The nation’s major retailers JB Hi-Fi, Harvey Norman and Wesfarmers saw their stock price decline as billions were wiped off the value of Australian shares on Tuesday.

JB Hi-Fi shares had fallen 5.7% for the session to $39.31, while Harvey Norman was 5.4% lower to $3.86. Supermarket giant Wesfarmers also weighed down a struggling market, losing 3.8% for the session.

Macquarie’s equities team placed downgrades on JB Hi-Fi, Harvey Norman, and Wesfarmers, predicting “significant pressure on discretionary spending” going forward.

Barrenjoey Capital Partners said in a note to clients it had made significant earnings cuts to discretionary retailers, with the analysts revising down earnings and price targets on much of the sector.

Paul Zahra, CEO, Australian Retailers Association said inflationary pressures remain a constant for businesses and consumers, and with the RBA increasing interest rates for the second straight month, there was more pressure being applied to household budgets.

“They’ve navigated the worst of the pandemic, but the hits just keep on coming from ongoing supply chain issues, staff shortages and the rising cost of fuel and materials. Many of the cost pressures this year are unprecedented,” he said.

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“While retail sales are at record levels, we know this is partially due to the higher prices we’re seeing for everyday day items.

“The costs of doing business have increased significantly through the pandemic and continue to rise this year – so it’s not necessarily an accurate reflection of sector performance. The ARA is engaging our new Federal ministers on how we can address the cost and logistical challenges around supply chains and labour and skills shortages that can support the retail recovery.”  

Macquarie analysts noted that while consumers may have some cash to spend, a combination of rising costs and big spending on electronics during COVID lockdowns could dampen discretionary spending moving forward.

“We have become increasingly concerned with the economic outlook for Australia and the impact that rising inflation and interest rates hikes are likely to have on discretionary spending," Macquarie's equities team said in its report.

“The likely overconsumption of goods over the past two years as a key risk to near-term performance."

“From a top-down perspective consumers appear to be in a strong position to continue to spend. However, it is not just an ability to spend that is important. Consumers also need to be willing to spend, and that willingness appears to be quickly contracting.”

“A rise in inflation increases the cost of staples for consumers, leaving less leftover money to purchase discretionary items. We would expect rising inflation to lower relative demand for discretionary items relative to staple items."

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