Australia’s Retail Sector Is ‘Under Duress’ as Earnings Season Starts

(Bloomberg) -- As Australia’s earnings season gets underway this week, the outlook for retail stocks is gloomy.

Back to back interest rate reductions and the government’s signature income tax cuts don’t appear to have sparked an increase in consumer spending, economists say. With stagnant domestic wages growth and offshore headwinds stemming from trade tensions and dovish central banks, there’s a risk that forecasts for the 2020 financial year may also be subdued.

“The consumption outlook will remain under duress until wages rise,” Saxo Capital Markets strategist Eleanor Creagh said in an interview. The expectation of a recovery in earnings this year “is optimistic against the current economic backdrop with many headwinds.”

JB Hi-Fi Ltd. is expected to report earnings early next week, while Super Retail Group Ltd. is due on Aug. 15. Harvey Norman Holdings Ltd. traditionally unveils its earnings at the end of the month.

June quarter retail sales data released Friday rose less than economists had expected, with volumes the weakest since 1991, according to Callam Pickering, an economist for the Asia-Pacific at Indeed.com

The Reserve Bank of Australia’s decision to lower interest rates in June and July to a record-low 1%, and the prospect of at least another cut to come “does free up a little cash for millions of Australian households, which could provide a near-term sugar hit for the retail sector,” Pickering said. “The problem is though unless you see that tick-up in wage growth, you’re unlikely to see persistent improvement in retail conditions.”

Australia is on track for its weakest fiscal year of growth since 1991 and a prolonged period of minimal wages growth highlights the difficulty retailers have of generating growth when consumers are more concerned about managing debt and paying bills.

The electrical retailers -- JB Hi-Fi and Harvey Norman -- probably have had tougher trading periods and are “at more risk” in terms of not meeting expectations, Credit Suisse analyst Grant Saligari said.

For more details on the outlook for the electronic retailers click here

Still, not all retailers may be set for bad news during earnings, with Saligari saying the supermarkets including Woolworths Ltd. and Coles Group Ltd. offer stability, while Creagh pointed to Lovisa Holdings Ltd. and Baby Bunting Ltd. as “standout” retailers.

--With assistance from Matthew Burgess.

To contact the reporter on this story: Sybilla Gross in Sydney at sgross61@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Tim Smith

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