What the Supercheap and Adairs results tell us about the retail sector

Some retailers – such as Supercheap Auto (ASX:SUL) – are reporting better than expected results this reporting season. But this hasn’t prevented many analysts from painting a gloomy picture of the retail sector, due largely to the impact of rising interest rates and inflation on consumers’ wallets. If they’re right, then there’s no need for investors to rush back in.

The risk of a ‘circular reference’ forming is all too obvious to me; analysts and commentators speak of the difficulty consumers face with rising mortgage interest rates, fuel, food and utility prices. Company CEOs consume the same media and retell the same stories.

And then along comes Supercheap Auto’s result. The company surprised attentive investors, reporting more resilient FY22 earnings than forecast. Sales, margins and EBIT were all higher than the number most analysts had anchored around. All four of the company’s brands reported strong sales in the second half of FY22, and group sales were up five per cent comfortably beating analysts estimates.

Supercheap then added a strong first six weeks of FY23 to its narrative. While group like-for-like sales are cycling the impacts of lockdowns in the previous corresponding period, they were up 17 per cent for the first month-and-a-half of FY23. Breaking down the period by business segment, the Auto business’s sales are 15 per cent higher, Rebel Sport is 13 per cent up, Boating Camping and Fishing is up 17 per cent and Macpac is 42 per cent better.

In other words, the second half of last year was strong, and that strength was continuing this year.

However, having read the same negative commentary as the rest of us, the company was not optimistic, noting, “while current trading remains strong, the group expects rising interest rates and higher costs of living will start to impact consumer spending”.

And of course, that comment then feeds the narrative already being perpetuated.

To my mind, there’s a risk investors and CEOs become so fearful of an uncertain future, they ignore a very certain opportunity.

But just as I was rationalising a more optimistic disposition, Adairs (ASX:ADH) reported their results with the following highlights…

Second half Adairs brand sales were flat year-on-year. Gross margin at 58.7 per cent was weaker than expected, as was EBIT and EBIT margins. Perhaps most surprising was Mocka Sales down eight per cent against expectations of growth, and gross margins well below expectations on the back of increasing supply chain costs and clearance activity. Group-wide inventory was elevated too.

It was a mixed result with second half NPAT down 11 per cent against expectations of growth, and second half Adairs and Mocka sales below expectations.

Maybe the bearish narrative is right. With even Supercheap’s share price four per cent below the day it reported perhaps investors are wise to keep an eye on the narrative. Only when that changes will good news be good news.


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