Christmas cheer could be patchy among retailers

HO ho ho . . . no? Economic indicators point to subdued Christmas shopping as household surpluses deplete and ratcheting interest rates and inflation wield their insidious influence at the tills.

According to the WestpacMelbourne Institute’s monthly measure, a record 40 per cent of consumers are looking to trim Christmas spending. Unlike others, though, we wouldn’t go so far as to compare Reserve Bank governor Philip Lowe with Dr Seuss’ famous Yuletideloathing Scrooge.

Flagging consumer sentiment bodes poorly for ASX discretionary retailers, but experiences will vary. One theory is that the retailers exposed to younger people will fare better, because they often live at home and are removed from mortgages and energy bills.

Purveyors of small value items look better placed than, say, Harvey Norman, which is exposed to home renovation and improvement.

One example is the youthoriented Lovisa (ASX:LOV), which specialises in cheaper “fast fashion” jewellery and has built a formidable global presence of 629 stores (only 154 are in Australia).

Under a new chief executive, Lovisa chalked up $458m of sales in the 2021-22 year, 20 per cent higher on a comparative basis (excluding new stores). Net earnings climbed 116 per cent to $60m. Seven weeks into the new financial year, sales were up a comparative 21 per cent, which shows it’s hard to pass up $14 rose gold diamante pearl snowman earrings.

The aromatic Dusk Group (ASX:DSK) sells stockingfiller stuff such as lavender scented candles, mood rings, diffusers and bath bombs – and sales have survived a pandemic-era flicker.

Lockdowns meant that Dusk’s sales last year fell 7 per cent in the 2021-22 year to $138m (but still 37 per cent up on 2019-20 turnover). Last month chief executive Peter King reported a 53 per cent sales increase for the first eight weeks of the financial year, with trading “notably stronger” in August than July.

We’re not aware of any nexus between economic conditions and clean-shaven visages and manicured moustaches, but Shaver Shop (ASX:SSG) is surfing the growth of the $1bn-a-year men’s grooming sector. As management noted at Thursday’s AGM, no one had heard of beard oils and balms three years ago. The pandemic was kind to the Shaver Shop, which registered a 4 per cent uptick in sales in 2021-22, to $223m.

Shaver Shop’s $16.7m net profit was only a razor-thin margin behind the previous year’s record surplus.

For income hunters, retailers are attractive because they spit out good cash flow and pay decent dividends. With their profits leveraged to the value of turnover, inflation may be more a friend than foe.

Meanwhile, the pull-back in valuations make for attractive buying. Having retreated 38 per cent in calendar 2022, Dusk Group shares are trading on earnings multiples of less than seven times and a yield of more than 10 per cent.

Shave Shop shares trade on a multiple of eight times and a 9 per cent yield. On the evidence to date, the Yuletide retail season could be more resilient than expected.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.