Consumer caution hits stock prices

The resurgence of retail stocks has taken another blow with retail sales continuing to underperform.

The resurgence of retail stocks has taken another blow with retail sales continuing to underperform.

On Monday, retail sales for April disappointed expectations, rising just 0.2 per cent, seasonally adjusted.

The largest contributor to the rise in sales was food, which grew by 0.5 per cent. This followed a 0.4 per cent fall in March.

Reacting to the data, consumer discretionary shares dropped 1.5 per cent, while consumer staples slid 1.1 per cent by close on Tuesday.

Despite interest rates being cut to a record low of 2.75 per cent, May saw a turnaround in the fortunes of retail shares, as consumer staples stocks lost 9 per cent and consumer discretionary fell 2.8 per cent.

"We had three good months at the beginning of the year, it's been a bit tougher since," said Platypus Asset Management chief investment officer Donald Williams.

However, over the past 12 months, consumer discretionary stocks have surged by 31.12 per cent, while staples have jumped 26.9 per cent, both outperforming the broader benchmark S&P/ASX 200, which is up 23 per cent.

"You've got some short-term issues, but the longer term view that we're at the beginning of a multi-year recovery in consumption is still valid," Mr Williams said.

Barring food-related stocks, weak consumer spending has plagued domestic retail stocks and the sector faces a number of structural issues, such as internet competition and the introduction of international retailers, that it has struggled to address.

"It's a bit like the horse and cart competing against the invention of the automobile," Tyndall senior analyst Craig Young said.

A lower Australian dollar would only marginally help retail stocks, Mr Young said. The price differential between Australian and international retailers was still very large, even if the dollar were to lose further ground.

"Once shoppers buy online, they generally keep buying online. It's kind of a big hurdle to make that step. And once you buy online domestically it's only a small step to buy online internationally.

"Because the pricing and the range is so much better overseas, you'd expect consumers to keep spending offshore, even if the price increases by 10-15 per cent because of currency."

The Australian retail market is only a blip on the radar and large international retailers, especially from the US, have the ability to offer significantly lower prices because they have lower labour costs and better buying prices.

While shipping internationally added extra costs, Mr Young said, the lower costs of the larger US enterprises offset this.

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