How Consumer Discretionary Sector Plans to Overcome Current Macro-economic Tensions- 2 Stocks to Consider

Company Overview:

KMD Brands Limited (NZX: KMD) is a global outdoor, lifestyle as well as sports company. The company is a designer, marketer, retailer and wholesaler of apparel, footwear and equipment for surfing and the outdoors. The Warehouse Group Limited (NZX: WHS) has evolved from the single The Warehouse store to become one of the leading retailing groups in NZ.

Kalkine’s Sector Report covers the Key Financial Metrics, Risks, Outlook, Technical Analysis along with the Valuation, Target Price, and Recommendation on the stock.

1. Sector Landscape and Outlook

As per Stats.NZ, in February 2024, spending in the retail industries witnessed a fall of 1.8% ($120 million) as well as spending in the core retail industries declined 1.4% (or $83 Mn) as compared to January 2024. With respect to the retail spending category, consumables were down by $23 Mn (or 0.9%), fuel fell by $21 Mn (or 3.7%) and durables were down by $15 Mn (or 0.9%). Also, apparels were down by $5.1 Mn (or 1.5%) and motor vehicles (excluding fuel) rose by $0.7 Mn (or 0.3%). The non-retail (excluding services) category declined $55 Mn (or 2.4%) as compared to January 2024. This category consists of medical and other health care, travel and tour arrangement, postal and courier delivery as well as other non-retail industries.

The services category increased $5.1 Mn (or 1.5%). This category consists of repair and maintenance, and personal care, funeral, and other personal services. The total value of electronic card spending, which includes the 2 non-retail categories (services and other non-retail), fell from January 2024, down by $176 Mn (or 1.9%).

In actual terms, cardholders were able to made 160 Mn transactions throughout all the industries in February 2024, with average value of $55 per transaction. The total amount which was spent using electronic cards stood at $8.8 Bn, reflecting a rise of 4.9% (or $409 Mn) from February 2023. Notably, February 2024 had extra day of trading because it was a leap year.

Exhibit 1: Percentage change in seasonally adjusted card transactions value by industry, January 2024–February 2024

Data Source: This work is based on/includes Stats NZ’s data which are licensed by Stats NZ for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Gross Domestic Product: December 2023 Quarter

As per Stats.NZ, In the December 2023 quarter, GDP witnessed a fall of 0.1%  as well as GDP per capita declined 0.7% as compared to the September 2023 quarter. Notably, the real gross national disposable income declined 1.4%. These movements are in seasonally adjusted chain volume terms (adjusted for the price inflation).

The economic activity declined 0.1% in the quarter ended December 2023 quarter as measured by GDP. This was after the 0.3% decline in the September 2023 quarter. GDP increased 0.6% over the year ended December 2023 as compared to year ended December 2022. In seasonally adjusted chain volume terms, wholesale trade declined 1.8% driven by grocery and liquor product wholesaling as well as machinery and equipment wholesaling.

On the other hand, rental, hiring as well as real estate services rose 1.0% driven by owner-occupied property operation and rental and hiring services (except real estate). Notably, the public administration and safety increased 2.8%.

Exhibit 2: Gross domestic product, quarterly and annual growth rates, chain-volume, September 2017–December 2023

Data Source: This work is based on/includes Stats NZ’s data which are licensed by Stats NZ for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Key Risks and Challenges:

The consumer discretionary market is exposed to increased competition from domestic as well as international tech- e-commerce companies, launch of brands and stores. Other risks include disruptions in the supply chain, increased labour shortages, global macro-economic challenges, global slowdown, etc. The companies might witness disruptions across their operations.

The Consumer discretionary industry is cyclical in nature. Therefore, rising and falling interest rates, growth momentum in wages, unemployment or inflation could impact the broader consumer discretionary sector.

Exhibit 3. Key Risks in Retail & Consumer Sector:

Source: Analysis by Kalkine Group

Outlook:

Most of the major and leading central banks are cautious regarding the easing of monetary policy considering risks of inflation persistence as well as elevated inflation expectations. Financial market pricing related to most of central bank policy rates is implying some easing in the later part of the year. The participants in global financial markets are reflecting robust confidence in the corporate earnings outlook, as could be implied in equity prices and credit spreads. 

The aggregate commodity price indices remained relatively stable even though there have been geopolitical uncertainties. Notably, oil prices rose while agricultural commodity prices have been weaker. There has been a recent increase in global shipping costs, which has partially receded.

Food as well as fibre sector export revenue outpaced expectations for the year ended 30 June 2023, rising 8% to $57.4 Bn and illustrating the sector’s successful navigation of the increasingly complex global trade situation. As per Beehive.govt.nz, new tourism data reflected continued importance of tourism to NZ economy as tourism has been stepping up to become the 2^nd biggest export earner.

The Tourism Satellite Account reflects how strongly tourism has rebounded post-pandemic, as total tourism expenditure in NZ stood at $37.7 Bn for the year ended March 2023, a rise of $10.7 Bn from the previous year. The overseas visitor expenditure rose $8.9 Bn to $10.8 Bn.

Apart from the sector-specific factors, an analysis on two NZX-listed companies is provided. This report covers their insights, outlook, performance and potential as expected to be delivered in the near to medium term.

1) KMD Brands Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 405.6 million, Annual Dividend Yield (TTM)¹: 10.53%)

Business Description:

KMD Brands Limited (NZX: KMD) is a global outdoor, lifestyle as well as sports company. The company is a designer, marketer, retailer and wholesaler of apparel, footwear and equipment for surfing and the outdoors.

Outlook:

The H1 sales trends have improved for all 3 brands. The company stated that improving Kathmandu sales performance is the immediate priority. KMD is expecting to witness progress in the H2 and into FY 2025 as it launches new innovative products, quick to market programmes, elevated visual merchandising, increased personalisation through recently released “Out There Rewards” as well as an expanded third-party brand strategy.

Valuation Methodology: Price/Earnings Per Share Based Relative Valuation (Illustrative)

Technical Overview:

Data Source: REFINITIV, Analysis: Kalkine Group

Technical Commentary:

On the daily chart, KMD’s stock prices are rebounding from its historical low established in March 2020 during a downtrend, anticipating for a potential minor rally. Moreover, after forming a bottom divergence in relation to prices, the momentum oscillator RSI (14-period) is rebounding from its oversold region, adding further evidence for the mentioned recommendation. Prices are trading between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. An important support level for the stock is placed at NZD 0.520, while key resistance level is situated at NZD 0.650.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.570 per share as on 11^th April 2024. 

2) The Warehouse Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 509.8 million, Annual Dividend Yield: 12.29%)

Business Description:

The Warehouse Group Limited (NZX: WHS) has evolved from the single The Warehouse store to become one of the leading retailing groups in NZ.

Outlook:

WHS announced half-year results for the six months ended 28 January 2024. It achieved an adjusted NPAT from continuing operations of $30.7 Mn, an increase of 18.9% on the same period of the last year.

The company’s focus is towards strengthening the core brands, delivering better products at great value as well as managing the costs. It is also focused on improving the product ranges. It has strengthened its balance sheet with higher operating and net cash flow, resulting in lower net debt of $18.7 Mn, down from $83.4 Mn as at H1 FY 2023.

Fundamental Valuation

Price/EPS Based Relative Valuation

Technical Overview:

WHS Daily Technical Chart, Data Source: REFINITIV

Technical Commentary:

While experiencing a downtrend, WHS’s stock prices broke surpassed the upper boundary of a descending wedge pattern on the daily chart, anticipating for a potential rally. In addition, the momentum oscillator RSI (14-period) is heading upward from the midpoint, providing further support for the previous observation. Prices are trading between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. A significant support level for the stock is positioned at NZD 1.31, while critical resistance level is located at NZD 1.72.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.470 per share, up by 1.38% as on 11^th April 2024.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: Past performance is not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is April 11, 2024. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4:  Annual Dividend Yield is on a Trailing Twelve Month (TTM¹) basis and are subject to change based on factors such as company performance, stock price changes, etc.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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