The relationship between a housing boom and increased consumer spending in the household retail sector might not be as linear as first thought.
Hype surrounded household retail as being the sector most likely to benefit from a resurgent housing market. But August retail numbers conclude something entirely different. Breaking down the numbers into sectors provides a more sobering reality.
The latest retail sales numbers show that on a seasonally adjusted basis, household goods declined 0.6 per cent, giving back some of July’s gains of 1.8 per cent. Electrical and electronic goods dropped the most, losing 1.3 per cent.
The graph below indicates the trend of household goods retailing is going up, albeit at a snail's pace.
Source: Australian Bureau of Statistics
How slowly are retail sales gaining? Very slowly. The compound annual growth rate over the past two years for household goods retailing comes in at 1.9 per cent. Over the same time Harvey Norman’s share price has an annual growth rate at a massive 21 per cent. JB Hi-Fi comes in at 53 per cent.
The difference in performance between the data the share price is poles apart and unsustainable.
Rising consumer confidence is flaunted as being favourable for retailers, but it is fast becoming a throw-away justification. The reality is retailers need actual spending to substantially pick up from current levels to justify share prices as they stand today.
Retailers have morphed over the past three years to remain profitable in a tough environment, but if consumers don’t come to the party and spend, past efforts will prove to be futile.
Cost cutting has been popular as it has an immediate impact to the balance sheet and makes margins and ratios look better on the surface, but future revenue growth is where the value for investors really lies.
A theme over reporting season for retailers was falling profit margins. While a weaker currency may encourage shoppers to splash cash locally, retailers won’t have the currency gains to provide a buffer when it comes to discounting. This leaves very few opportunities for retailers to transform once again from here.
Historically, the retail sales data highlights there isn’t a conclusive link between rising house prices and consumers spending on household goods. The thesis of a booming housing market being a positive for the likes of Harvey Norman and JB Hi-Fi appear dashed.