Department stores will benefit the most from an increase in consumer confidence triggered by an interest rate cut, according to UBS.
DEPARTMENT stores Myer and David Jones as well as JB Hi-Fi will benefit the most from an increase in retail sales and consumer confidence triggered by an interest rate cut, according to UBS.
Analyst Ben Gilbert said if the Reserve Bank of Australia announced an easing in official interest rates tomorrow the new monetary setting would be a positive catalyst for consumer sentiment heading into the key Christmas trading period. It posed potential ''upside risk'' to discretionary retail earnings for 2011-12.
''The sectors that have generated the greatest outperformance have been household goods and (surprisingly) Woolworths-Wesfarmers, while department store performance has been in line,'' Mr Gilbert said.
''The outperformance in our view has occurred in anticipation of improving confidence and a consequent retail sales uplift, which have in most instances eventuated following an easing cycle.''
He believed Myer had the highest level of operating leverage should retail sales improve ahead of expectations.
''We estimate every 1 per cent sales beat would deliver a 3.2 per cent EBIT upgrade, all else being equal. This compares to David Jones and JB Hi-Fi who generate EBIT leverage 2.2 times and 1.5 times respectively. Myer's superior operating leverage reflects: high fixed-cost base with roughly 46 per cent of cost of doing business fixed on an ex-staff expense basis use of permanent staff and possibly less generous incentive program relative to JB Hi-Fi, and: cost base capable of supporting a much higher level of sales productivity.''
Mr Gilbert's report said that on an absolute basis, retailers had delivered outperformance for the three months following eight of the past 12 cuts in the RBA cash rate since 2001. Assuming retail trends picked up into Christmas, he believed Myer and JB Hi-Fi were the top two shares to own.
''Myer offers the greatest level of operating leverage of the discretionary retailers, in our view.
''For the entire discretionary space market expectations remain low, with retailers making up five of the top 10 most shorted stocks, JB Hi-Fi being the most shorted stock in the ASX200. We believe Myer, followed by JB Hi-Fi, offers the most immediate upside from both an earnings and share price perspective should a rate cut occur ? Tuesday.''
In the UBS analysis, Billabong and Pacific Brands were excluded given the high level of offshore earnings for the surfwear company and the more staple nature of Pacific Brand's offering.
Frequently Asked Questions about this Article…
How would an RBA interest rate cut affect retail stocks and consumer confidence?
UBS says an RBA interest rate cut would likely boost consumer confidence and retail sales, acting as a positive catalyst for discretionary retailers heading into the key Christmas trading period and creating upside risk to 2011–12 earnings for those retailers.
Which retail stocks did UBS identify as most likely to benefit from a rate cut?
UBS highlighted department stores Myer and David Jones, along with electronics retailer JB Hi‑Fi, as the biggest beneficiaries of a retail sales uplift triggered by a rate cut. UBS specifically named Myer and JB Hi‑Fi as the top two shares to own if retail trends pick up into Christmas.
Why does UBS say Myer has strong operating leverage and what does that mean for investors?
UBS notes Myer has the highest operating leverage among discretionary retailers — it has a relatively high fixed‑cost base (roughly 46% of the cost of doing business fixed on an ex‑staff expense basis), greater use of permanent staff and possibly less generous incentives than peers. That means if sales rise, Myer’s earnings (EBIT) should increase proportionately more, offering greater upside to investors.
How do Myer, David Jones and JB Hi‑Fi compare in EBIT leverage?
UBS estimates that every 1% sales beat would deliver about a 3.2% EBIT upgrade for Myer. David Jones generates roughly 2.2 times EBIT leverage and JB Hi‑Fi about 1.5 times, making Myer the most sensitive to sales upside.
Have retail stocks historically outperformed after RBA cash rate cuts?
According to UBS, retailers delivered outperformance in the three months after eight of the past 12 RBA cash rate cuts since 2001, suggesting a historical tendency for retail stocks to benefit in the near term following easing cycles.
Which retail sectors have outperformed recently, according to UBS?
UBS found that household goods and, somewhat surprisingly, Woolworths‑Wesfarmers have generated the greatest outperformance recently, while department store performance has been broadly in line with the market.
Why were Billabong and Pacific Brands excluded from UBS’s discretionary retail analysis?
UBS excluded Billabong because of its high level of offshore earnings, which makes it less sensitive to domestic rate moves, and excluded Pacific Brands because its offering is more staple‑like rather than discretionary.
What risks and market expectations does UBS highlight for discretionary retail stocks?
UBS notes market expectations are low across the discretionary space: retailers make up five of the top 10 most shorted ASX stocks, with JB Hi‑Fi the most shorted stock in the ASX200. That high short interest implies amplified upside if consumer confidence and retail sales improve after a rate cut.
Call 1300 880 160
Start a chat
Schedule a call
