By Emma Koehn
A 25 per cent slump in earnings at electronics giant Harvey Norman could be the tip of the iceberg for consumer spending woes, as analysts warn of a tough year ahead for discretionary stocks and well-known brands report softer conditions.
The ASX-listed white goods and furniture seller warned investors on Wednesday that based on trading for the first 11 months of the 2023 financial year, it expects its pretax profit excluding net property revaluations and some other items will fall to between $637 million and $703 million, down from $943 million last year.
Retail analysts have been bracing for more pain among discretionary retailers for the rest of the 2023 year. Credit: Scott Barbour
Stock watchers have predicted for months that Harvey Norman would be forced to face up to a spending slowdown, despite shoppers remaining exuberant for much longer than expected in an environment of sustained interest rate rises. Harvey Norman reported a 15.1 per cent slide in half-year net profits in February, blaming a cooler summer which had hurt sales of big-ticket items such as air-conditioners.
Now retail experts and analysts view Harvey Norman’s woes as just one piece of a bigger puzzle the entire retail sector faces, with consumers no longer able to ignore the financial pain of 12 successive rate rises.
“We remain of the view consumer spending will be challenging over the next 12 to 18 months,” E&P Financial retail analyst Philip Kimber said on Wednesday.
“In particular for those segments that materially benefited through the COVID period [and thus are coming off an] abnormally high base.”
E&P said in a note to clients that based on Harvey Norman’s market disclosure, it appeared the company was on track for second-half net profits to fall by up to 50 per cent compared with last year.
Investment bank UBS is also cautious about the outlook, having downgraded a number of the companies it follows last week. Its team has a “sell” rating on Harvey Norman, footwear seller Accent Group and Rebel owner Super Retail Group, while it has dropped earnings expectations for fashion jewellery chain Lovisa and Universal Store.
“This slowdown [in spending] started in big-ticket retail in early calendar year 2023 and has now broadened,” analyst Shaun Cousins said in a note to clients.
Recent trading updates from Universal Store, Best & Less, Baby Bunting and Michael Hill International have also pointed towards softer trading conditions.
Parcel data released this week highlights softening spending in several discretionary spending categories.
Data from logistics software business Shippit, tracking millions of transactions across its network of retailers in June, reveals online orders are weakening in a range of areas.
Shopping data collected up to June 20, 2023, showed online orders of home furnishings were tracking 10 per cent lower than in 2022, while the volume of orders for computers and accessories was down by 48 per cent.
Car-related purchases, cosmetics, outdoor activities and footwear were the only categories where the volume of orders increased in June 2023, according to the Shippit data.
Pessimism about the consumer outlook has largely been built into the share prices of several discretionary retailers, however.
Harvey Norman’s share price jumped 4.9 per cent on Wednesday despite the predicted profit slump as retailers’ shares rallied, thanks to a report that showed the inflation rate cooled down to the smallest increase in more than a year, with prices rising by 5.6 per cent in the 12 months to May, down from 6.8 per cent the month before and well below the December peak of 8.4 per cent. The inflation reprieve raised hopes the Reserve Bank will be able to pause its painful cycle of rate hikes.
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