A ray of retail optimism

Morgan Stanley says retail spending is improving but some retailers might be shooting themselves in the feet by opening to many stores.

Morgan Stanley’s Thomas Kierath says retail spending is improving along with the housing market, the stock market and consumer confidence.

The improvement in retail spending will outweigh higher rates of savings and an ongoing reallocation of spending to the non-retail sector, says Kierath. He forecasts retail sales growth of between 3 and 4% per annum from the end of 2013. The comments were made before National Australia Bank released its business conditions survey for June, which showed retail activity at the lowest point in the survey's 16-year history (see Roger Montgomery's Kathmandu weathers changing retail climate).

The Morgan Stanley analyst says supermarkets are embarking on “irrational” store openings. Industry space growth will be 3.5% over the next three years compared with a population growth of 1.6%. Supermarket space has outpaced population growth over the last decade, according to Kierath.

There is a risk, he says, that price competition between supermarkets will crimp margins and drive down profits.

At 1326 AEST Woolworths shares were up 50 cents, or 1.5%, to $33.03. The stock has gained 24% in the last 12 months and Kierath says it is “overvalued”.

Wesfarmers, owners of Coles supermarkets, gained 51 cents, or 1.3%, to $39.42. The stock has added 30% in the last 12 months and Kierath thinks its dividend will increase because of stronger Coles insurance and Kmart profits.

David Jones, however, has the potential to double its 4% operating margin, ex property, he says. The company’s development of its own labels, its store optimisation and online strategy will help bolster its business, says Kierath.

The Morgan Stanley analyst recommends investors buy David Jones. David Jones shares rose 3.5 cents, or 1.4%, to $2.555. The stock is up 6.5% in the last 12 months compared to the 18% increase in the S&P/ASX200 Index.

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