Earnings season is nearly over.
Coal stocks notched record profits, the big banks made the most of rising interest rates, and Zip Co [ASX:ZIP] continued to incinerate cash.
It was an exciting reporting season that also offered opportunities to consolidate individual results into larger themes.
I think a clear theme emerged in the retail sector.
Retail sales volumes down, says ABS
Household consumption is a key component of the economy. After all, household consumption is about 50% of Australia’s gross domestic product (GDP).
Household spending indicators are, therefore, a great way to assess the mood and health of the economy.
Earlier this month, the Australian Bureau of Statistics (ABS) reported that retail volumes across the country fell 0.2% in the December quarter, the first fall in sales volume since the 2021 September quarter.
Volumes fell across all non-food industries — shoes, clothes, electronics, you name it.
Department stores had the largest volume fall of 2.9% while clothing, footwear and personal accessory retailing volumes fell 2.3%.
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| Source: RBA |
Importantly, while retail sales fell 0.2% in the December quarter, retail sales fell a material 3.9% in the month of December.
That was the first monthly fall in retail turnover for 2022 after 11 straight monthly increases.
ABS said:
‘The large fall in December suggests that retail spending is slowing due to high cost-of-living pressures. Retail businesses reported that many consumers had responded to these pressures by doing more Christmas shopping in November to take advantage of heavy promotional activity and discounting as part of the Black Friday sales event.’
Discounting is very important, too.
And I know that because Philip Lowe told me.
Why discounts are important
On 17 February, Reserve Bank governor Philip Lowe appeared before the House of Representatives Standing Committee on Economics.
I tuned in for a while and happened to be listening when Lowe said a very interesting thing about the importance of discounting as an economic tell:
‘I don’t recall any business ever saying they’d increased their prices to generate fat in their margins. The main message we have been hearing from business over recent times is that it’s hard to get workers, there’s a lot of turnover in the labour market and they’re having to pay more. They’re telling us now that it’s still hard to get workers, but not as hard, and demand is still strong. We see that in all the business surveys. Businesses are saying things are above average.
‘On pricing, they don’t say this, but when demand is strong, you don’t discount. If demand for your product is strong, why would you discount? That’s one of the reasons, I think, why inflation has been high recently. Demand is strong and firms don’t discount. Some firms, no doubt, take the opportunity to put up their price when demand is strong. That’s how it works. Higher interest rates will mean that demand won’t be so strong, and firms will once again start discounting and prices will have to be a bit skinnier. We expect that to play out over the course of this year. That’s the process of bringing inflation down. That’s what we hear. But firms don’t talk about pricing; they normally say, “Our costs are going up, so we’ve got to put our prices up.” But we know that when demand is strong, you don’t discount and you put your prices up.’
Discounts are a neat way to measure demand. As Lowe pointed out when overall demand is strong, why would businesses discount?
It is interesting, though, that Lowe said demand remained strong and ‘businesses are saying things are above average’.
As the December quarter retail sales data showed, demand sure looks to be softening. Today’s monthly retail data release for the month of January will be very intriguing.
Not to mention that in the meeting minutes of the latest RBA board meeting, members noted weakening demand:
‘Members noted that recent retail sales data indicated that growth in spending on discretionary goods had been moderating and retail trade volumes had declined a little in the December quarter. Liaison with retailers suggested that conditions had been mixed in January.’
If only I could gather all the ASX updates from the last six months and see how many times ‘discounting’ and its variants were mentioned versus the prior relevant six-month periods!
But I’m sure some analyst at some big investment bank is probably doing that right now. Hopefully, they’ll grace us with a public research note.
In any case, we can hack our way to some insights on discounting by checking the recent half-year reports from retailers like Kogan, City Chic Collective, Dusk, Shaver Shop, and BWX.
Retail sales down, agree retailers
In the last few trading days, most ASX retailers released their half-year results.
Take women’s apparel retailer City Chic Collective [ASX:CCX].
Its 1H23 sales revenue fell 8%, and trading was down 17% in the first seven weeks of 2H23 on the prior corresponding period.
While it didn’t mention discounting, City Chic did mention ‘promotional activity’ and ‘clearance’ sales:
‘Operating conditions remain uncertain, with trading in the first seven weeks of 2H FY23 17% below the prior corresponding period. Promotional levels remain elevated as competitors drive deeper clearance activity to drive customer demand. City Chic is trading with higher than normal end of season clearance in all markets to clear end of line inventory ahead of key warehouse consolidation. It anticipates a more normal promotional cadence as seasons transition into the fourth quarter.’
Now take Kogan.com [ASX:KGN].
Kogan’s 1H23 revenue tumbled 34% to $275.6 million, while gross profit fell 42% due to ‘unprecedented discounting’ because of lower demand and Kogan’s struggles with excess inventory.
Under the heading ‘Positive outlook for 2H23’, Kogan said it expected to ‘gain further efficiencies in operating costs’, describing itself as a ‘dynamic portfolio of businesses.’
But the positive outlook was short on concrete guidance. If anything, the trading update for the month of January was mixed and explicitly mentioned discounting:
- Gross sales were down 33.2% year on year to $68.8 million
- Gross margin is up 7.9% to 32.9% year on year (‘reflecting the reduction of excess inventory sold with heavy discounting’)
- Positive ‘adjusted EBITDA’ of $1.5 million
What about JB Hi-Fi [ASX:JBH], Australia’s premier retailer?
Despite a strong 1H23 result, JB Hi-Fi admitted it is starting to see sales growth moderating.
Importantly, chief executive Terry Smart was quoted in the Australian Financial Review that discounting was inevitable:
‘JB Hi-Fi’s Mr Smart said it is inevitable there will be more “on-floor” discounting in prices as sales across the industry slow and competition between retailers hots up. There were now virtually no constraints on product availability after an extended period of supply chain disruptions stemming from the COVID-19 pandemic. In some categories such as big-screen television sets, a combination of cautious consumers, better supply and industry-wide discounting to win market share had prompted a fall in prices. “It’s dropping some prices down,” he said.’
And what about Adore Beauty Group [ASX:ABY]?
The beauty retailer’s 1H23 revenue fell 17% to $93.6 million on an EBITDA margin of just 0.4%!
Like City Chic, Adore Beaty didn’t mention discounting but did mention promotional activity:
‘While many of our customers consider beauty products part of their daily routine, revenue and margins in H1FY23 were impacted by increased promotional activity and inflationary cost pressures. In my first seven weeks in the role, we have commenced work on additional cost management and margin optimisation programs with new initiatives to be implemented later in H2. We expect to see the full impact of these in FY24.’
I don’t have time to look at all the retail releases here, but I’d wager other ASX retailers mentioned discounting and its euphemisms this reporting season.
Maybe we can gather all this into Lowe’s Law:
‘If demand is strong, a business doesn’t discount. If a business does discount, demand isn’t strong.’
Long live Lowe’s Law!
Regards,
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Kiryll Prakapenka,
Editor, Money Morning
