NZ Retail Sales Soar Back To Life; Three Stocks Warrant Closer Attention

Thursday, 23 July 2020, 5:41 pm
Article: Kalkine

Summary

• Retail NZ Sales Index marked a year-on-year rise of 34 per cent in June, while NZ retail card spending soared by ~16 per cent during the month.
• Improved trading conditions led to a significant uplift in retailer confidence in June, with ~73 per cent of retailers expressing confidence over the survival of their businesses in the next 12 months.
• Three NZX-listed retailers that appear to have regained much of the ground lost amid lockdown restrictions include Michael Hill International Limited (NZX:MHJ), Kathmandu Holdings Limited (NZX:KMD) and Meridian Energy Limited (NZX:MEL).
• Despite promising indications, risk lingers on household incomes and consumer spending following the termination of government’s wage subsidy scheme and other household support mechanisms that can induce massive job losses across Kiwi Land.

While the coronavirus pandemic initially left the NZ economy in dire straits with sluggish growth and thousands of people out of work, the nation stands out in recovering as soon as virus restrictions eased. One such parameter in which NZ marked a strong comeback is retail sales that soared back to life in May 2020 and continued to thrive in June.

Following a surge of ~80 per cent in May 2020, NZ retail card spending increased by ~16 per cent to NZD 5.7 billion in June, as reported by Stats NZ.

Besides, the latest Retail Radar report demonstrated a year-on-year rise of 34 per cent in Retail NZ Sales Index in June 2020. The growth in retail spending reflected robust pent-up demand from customers for accessing products and services that they were unable to buy during the lockdown phase.

The report also highlighted a considerable uplift in retailer confidence following improved trading conditions in June, with around 73 per cent of retailers expressing confidence over the survival of their businesses in the next 12 months.

Akin to Kiwi Land, Australia also extended recovery in retail turnover during June 2020, observing a month-on-month rise of 2.4 per cent, as per the Australian Bureau of Statistics.

While retailer confidence and sales index soared in NZ in June 2020, risk lingers on household incomes and consumer spending following the termination of Government’s wage subsidy scheme and other household support mechanisms that can induce massive job losses across the nation. This may call for further Government support over the coming months in terms of wage subsidy extension, tax cuts or rent reliefs to aid business survival.

Moreover, retailers that are quick to adapt to ‘new-normal’ while diversifying away from brick-and-mortar model are more likely to sweep through the coronavirus storm.

With that said, let us gaze through three such NZX-listed retailers that appear to have regained much of the ground lost amid COVID-19 lockdown restrictions:

Michael Hill International Limited (NZX:MHJ)

Jewellery retailer, Michael Hill International Limited (NZX:MHJ) recently reported a rise of 2.7 per cent in adjusted same-store sales in FY20 despite temporary closure of all stores in late-March 2020 and staggered reopening of stores since May.

While adjusted same-store sales declined by ~4.1 per cent in June quarter 2020 (FY20 Q4) on the prior year, the Company’s digital sales reached new highs during the quarter with online sales marking a rise of 193 per cent on the prior year.

The Company enhanced focus on digital channels while ramping up delivery of various digital initiatives, including the launch of virtual selling and virtual appointments, improved website and user experiences, and advancements of its WeChat platform.

Michael Hill appears to have emerged from store closures as a leaner, solid and more focussed business, experiencing a robust start to FY21 with all channels and markets ahead of the previous year.

Meridian Energy Limited (NZX:MEL)

Electricity generator and retailer, Meridian Energy Limited (NZX:MEL) witnessed an increase of 15.6 per cent in NZ retail sales volumes in June 2020 relative to June 2019, supported by a rise in customer connection numbers.

In comparison to June 2019, the Company observed increased segment sales in all divisions, including small-medium business (4.3 per cent), residential (6.0 per cent), large business (18.8 per cent), agricultural (19.4 per cent) and corporate (26.3 per cent).

On the flip side, Standard & Poor’s Global Ratings has recently revised its credit rating outlook from BBB+/Stable to BBB+/Negative. The outlook reflects the risk of a challenging operating environment for the Company in 2-3 years post the closure of Rio Tinto’s NZ Aluminum Smelter on 31st August 2021.

Kathmandu Holdings Limited (NZX:KMD)

While retail store company Kathmandu Holdings Limited (NZX:KMD) noted a year-on-year decline of 15.1 per cent in total group sales over 10 months ended 31st May 2020 amid COVID-19-driven restrictions, the Company marked a solid return to positive same-store sales growth following the re-opening of retail stores.

During 18th May 2020 to 28th June 2020, Rip Curl same-store sales surged by 21 per cent, while Kathmandu’s same-store sales soared by 12.5 per cent, backed by strong online sales. Since the re-opening of stores, retail store and online sales have typically surpassed management expectations, strengthening the Company’s liquidity.

Based on existing coronavirus conditions, the Company expects its FY20 adjusted EBITDA to be above NZD 70 million, while it anticipates gross margin to be at the lower end of 61 per cent to 63 per cent target range.

Though Government support packages and pent-up consumer demand seem to be underpinning retail sales growth at present, heightened level of uncertainty persists over medium-term levels of consumer demand amid potential second wave of infections. However, the Government’s recent decision to set aside NZD 14 billion aid for re-emergence of coronavirus is likely to offer a firm nudge to the NZ economy.

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