Retail investors eye a merry Xmas

The market performance of top retailers suggests that investors are expecting the best holiday season in years.

The prospect of blistering sales over Christmas has pushed some retailers to yearly highs.

Both David Jones and JB Hi-Fi reported impressive sales numbers for the first quarter of this financial year and have been rewarded by the market. Since last Wednesday, David Jones has gained a massive 14.5 per cent and JB Hi-Fi 4.7 per cent. Overall the retail index has climbed 3.5 per cent against a flat benchmark index, which is impressive for a sector that has struggled to secure traction with investors.

Nothing short of convincing moves on the market over the past week suggest investors are expecting sales for the December quarter to follow the positive trend of this financial year. The hope is sales numbers will result in increasing profits and higher share prices.

While lower interest rates have consistently been talked about as lifting consumer spending and consequently earnings of retailers, it hasn’t been a clear relationship. In theory, the proposition makes sense but it is evident that consumers are spending their disposable income elsewhere.

Expectations of surging Christmas sales might not come to fruition if disposable income is directed elsewhere. Alternatives contesting for disposable income include experiences, largely restaurants and services, online shopping and paying down of debt.

According to the Australian Bureau of Statistics, department store sales fell 1.5 per cent in the September quarter. On this basis it is difficult to assume lower interest rates are going to be propping up discretionary retailers come Christmas if it hasn’t already.

As far as September quarter sales number goes, David Jones recorded the fastest sales growth in the past 12 quarters. To maintain the staying power David Jones needs seasonal conditions to remain favourable – rising sales and maintaining profit margins will result in positive earnings leverage.

Despite positive sales for the September quarter, analysts are not overly enthused about the future for David Jones with the latest consensus views only coming in at a hold, a change from sell. The current share price of $3.08 for David Jones is also comfortably above the target price expectations.

JB Hi-Fi has proved to be a dominant force in the retail industry, consistently posting strong sales numbers. Beyond the Christmas sales rush, conditions for this quarter look favourable as PlayStation 4 and Xbox One release new game consoles in November.

Release of new products could help offset falling sales for the full year against last year as fewer stores are opened, impacting final sales numbers. Over two-thirds of JB Hi-Fi’s earnings are generated in this half year, making this quarter absolutely crucial to the firm’s overall performance.

As with David Jones, analysts have a neutral view on JB Hi-Fi and it is also trading above the upper end of analyst target prices.