EUR 850.00 For Business Accounts Only

Morningstar | Economic Cooling Could Lead to Opportunities in Australian Retail

A much-mooted concern of investors in the Australian retail sector is the potential of a more pronounced decline in consumer spending on account of the weak housing market or perhaps even a wider-spread slowdown in economic activity--such as a recession. Australians have been dodging the bullet for a record-breaking 106 quarters but at some point, this lucky streak must come to an end. We avoid the futile exercise of predicting the timing of the next Australian recession and we aren't forecasting a cyclical decline in our base case. As Nobel Prize laureate Paul Samuelson famously put it: "The stock market has predicted nine of the past five recessions."

However, we have traveled back in time to jog our memory on how the last Australian recession impacted the retail sector. We've run two scenarios, examining the performance of 10 Australian retail chains during the early 1990s, as case studies to understand how a similar downturn might pan out for retailers today. We analysed sales and EBIT data from fiscal 1990, the eve of Australia's last recession, to fiscal 1993, when we judge most of the associated ripple effects had dissipated.

We surmise a sell-off in retailing stocks due to cyclical earnings weakness could provide opportunities to long-term, fundamental investors. Consumer staples Woolworths and Coles are among the least volatile investments. In contrast, Wesfarmers' earnings from its Bunnings hardware business aren't defensive.

We retain our fair value estimates on narrow-moat Woolworths at AUD 24.50, wide-moat Wesfarmers at AUD 30.00, no-moat Coles at AUD 12.30, no-moat Metcash at AUD 2.40, no-moat Premier Investments at AUD 14.50, no-moat Super Retail at AUD 7.50, and no-moat Myer at AUD 0.66.

For more detail please refer to our report “The Morningstar Time Machine Revisits Australia's Last Recession” published May 20, 2019.