MARKETS SPECTATOR: Retail pressure goes offline

Morgan Stanley has some good news for retailers, saying that investors have finally fully priced in the online challenge.

Department store operators David Jones and Myer should relax. The online challenge is moderating, says Morgan Stanley analyst Thomas Kierath.

“As long as the retail cycle continues to improve – and we think it will given our view that interest rates can be cut further – we think the discretionary retailers are set for a period of outperformance,” says Kierath, who is recommending investors buy David Jones and Myer.

Still, Kierath says Australian retailers are at a disadvantage compared to their global peers because their labour and rent costs are high. But if the Australian dollar continues to weaken the analyst forecasts that more Australians may buy onshore rather than buy through the online sites of offshore retailers in the US, Europe or Asia.

Moreover, says the Morgan Stanley analyst, Australian retailers have improved their online business by widening their product offerings and lowering shipping costs, even if they have a long way to go before they reach the standard of their foreign competitors.

But while Kierath is bullish on the department store operators he is considerably less so about the supermarket chains.

“The supermarkets trade on relative rich multiples with minimal earnings growth,” he says. “We see their collective store rollout plans as irrational, increasing the risk of rising price competition and lower margins.”

At 1146 AEST David Jones shares were up 7.5 cents, or 3.2 per cent, to $2.415. Myer’s stock had added 11.5 cents, or 5.2 per cent, to $2.315. Harvey Norman shares were up 9 cents, or 3.8 per cent, to $2.45.

Woolworths stock had risen 40 cents, or 1.3 per cent, to $31.98. Wesfarmers, which owns the Coles supermarket chain, had gained 99 cents, or 2.7 per cent, to $38.13.

The benchmark S&P/ASX200 Index was up 61.140, or 1.3 per cent, to 4,756.90.

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