Woolworths or Coles? Goldman Sachs analysts have made their call as they compare some key choices facing investors in the retail sector.
The exercise comes after GS’s global retail conference gave some interesting insights into the lay of the land.
There were a few major takeaways from the conference, and although these are particularly relevant to the US, GS says they can also be extrapolated to the Aussie market.
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Resilient, but bifurcating consumers
Despite negative headlines, on-the-ground trends suggest more consumer resilience, especially across Staples categories due to still-strong employment and excess savings.
There are however notable differences between income groups of more than $US100K household incomes, versus those less than $US100K.
Households with income more than $100,000 are still spending, whereas those in the lower bracket, unsurprisingly, are becoming more selective and gravitating towards extreme value, especially on discretionary big ticket items.
Normalised retail environment
Most retailers note that the retail environment has largely normalised with supply chain speed, agility and service levels largely back to pre-Covid levels.
Lower international freight should provide flexibility on pricing v margin.
Most retailers are also comfortable on the size and quality of their inventory heading into the holiday period.
Market share is a key goal
Next year will likely be one of inflation moderation v volume growth focus.
Market share is a key goal for most retailers given the broader industry slowdown.
Focus for most staples retailers next year will be on customer personalisation, loyalty and supply chain improvement.
For discretionary retailers, emphasis will be on product innovation, physical store rollout and omni-channel experience including e-Commerce.
Many retailers stated that they had invested into consumer data, digital, automation and loyalty capabilities – which enabled better precision execution in an increasingly complex environment where labour inflation remained high.
GS likes the look of Walmart
In the US, Goldman Sachs says it likes Walmart (NYSE:WMT) stock.
This is because the operating model for grocery retailers continues to evolve from a store based model, to an omni-channel, ecosystem based model.
Walmart called this the “new P&L” where it will be more of a consumer-centric view, including 1P/3P market place, loyalty, retail media etc.
1P/3P describes a marketplace where the retailer buys the product wholesale from the supplier, whereas in a 3P, the suppliers themselves are independent sellers on the platform.
Walmart CEO has noted that the profitability of this integrated “new P&L” can be higher than the “old P&L”.
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GS rules on ASX retail stocks
F&B (FOOD & BEVERAGE) RETAIL
In Australia, GS believes that F&B grocery retail in FY24 will begin to moderate – with mid-single digit industry growth.
In this category, GS says it continues to prefer Woolworths (ASX:WOW) over Coles (ASX:COL).
“Early investments by Woolworths on the store network, technology and automation, as well as digital and omni-channel capabilities, are beginning to pay-off,” noted GS.
“We believe FY24/25 will be a period for WOW to take market share, while still expanding EBIT margins…”.
DISCRETIONARY RETAIL
Within the Australian discretionary retail space, GS continues to prefer Super Retail Group (ASX:SUL), over Premier Investments (ASX:PMV).
SUL is the owner of four brands: Supercheap Auto, Rebel, BCF and Macpac. PMV meanwhile owns Just Group (which in turn has the likes of Just Jeans, Jay Jays, Portmans, Dotti and Smiggle), and has stakes in Breville and Myer.
GS believes SUL’s auto and outdoor categories are likely to be more resilient in demand when compared to mass-market apparel sold by PMV.
For JB Hi-Fi (ASX:JBH) and Harvey Norman (ASX:HVN) meanwhile, GS remains cautious on ongoing industry demand weakness, similar to the US.
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HOME IMPROVEMENT
GS expects sales growth of the home improvement sector to remain largely stable, given home prices and transactions are resilient.
The return of immigration should also help sustain demand.
GS says it like the looks of Bunnings, which is owned by Wesfarmers (ASX:WES).
“That said, with already 60 per cent-plus market share in DIY, we believe that Commercial is the largest growth opportunity for Bunnings,” GS said.
“As such, for us to turn positive on WES (currently Neutral), we would like to better understand how Bunnings is building capability in Commercial to deliver consistent share gain,” said GS’ note.
GLOBAL BRANDS
GS says it is encouraged by the effectiveness in successful innovation and newness stimulating sales, especially in mid-high end brands.
In this space, the broker continues to prefer Treasury Wine Estates (ASX:TWE) and Breville Group (ASX:BRG) over A2 Milk (ASX:A2M) and Domino’s Pizza (ASX:DMP) – with both these latter stocks getting a Sell recommendation.
“TWE is focusing on brand and innovation, including 19 Crimes rebranding, ONE by Penfolds, and multi-country-of-origin launches of Matua and Frank Family,” says GS.
For Breville Group, brands such as Barista Touch Impress, Vertuo Creatista, Joule Turbo Sous Vide and the Breville+ platform continue to shine, says GS.
“There continues to be strong demand and a penetration run-way for products that solve under-served demand, in less price sensitive categories.
“In contrast, we expect A2 Milk to still be dragged by underwhelming demand in China and lower child births,” said the note out of GS.
This content first appeared on stockhead.com.au
The views, information, or opinions expressed in the interview in this article are solely those of the broker and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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Originally published as Goldman’s pitted a bunch of ASX retail stocks in head-to-heads
