How Will Current Inflationary Fears Impact Broader Consumer Discretionary Sector- 2 Stocks to Consider

Company Overview: FWL is in the wineries business and holds iconic wineries and brands from New Zealand’s most acclaimed wine regions. Cooks Coffee Company Limited (NZX: CCC) owns the international intellectual property as well as master franchising rights to the Esquires Coffee brand globally (excluding ANZ).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

Stats.NZ has released electronic card transactions data for the month of July 2023. The spending in the retail industries was unchanged for the month of July 2023 as compared to June 2023 month. The spending in the core retail industries fell 0.1% (or $4.8 million). Talking about the spending category, in consumables, there was an increase of $22 Mn (or 0.9%), apparel, up $0.7 Mn (or 0.2%) and durables, down $8.7 Mn (or 0.5%). The non-retail (excluding services) category fell by $78 Mn (or 3.6%) from June 2023. This category includes medical as well as other health care, travel and tour arrangement, postal and courier delivery, and other non-retail industries. The services category fell by $11 Mn (or 2.9%). This category consists of repair and maintenance, and personal care, funeral, and other personal services. The total value of electronic card spending, including 2 non-retail categories (services and other non-retail), decreased from June 2023, down $85 Mn (or 0.9%).

The spending in the hospitality industry rose 6.3% (or $75 Mn) between July 2022 and July 2023. In actual terms, cardholders made 161 Mn transactions throughout all the industries in July 2023, with an average value of $55 per transaction. The total amount spent utilising electronic cards was $8.8 Bn.

Exhibit 1: Percentage change in seasonally adjusted card transaction values by industry, June 2023–July 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

Seasonally Adjusted Retail Sales Witnessed a Decline

As per Stats.NZ, total volume of seasonally adjusted retail sales stood at $25 Bn, reflecting a fall of 1.0% as well as total value of seasonally adjusted retail sales amounted to $30 billion, down 0.2% (or $60 Mn) in the June 2023 quarter as compared to the March 2023 quarter. Notably, 10 of the 16 regions witnessed higher seasonally adjusted sales values. Notably, total value of actual retail sales stood at $29 Bn, reflecting a rise of 2.5% (or $725 Mn) as compared to June 2022 quarter.

By industry, the largest movements were in motor vehicle and parts retailing (up 3.7%), food and beverage services (down 4.4%), hardware, building, and garden supplies (down 4.8%), clothing, footwear, and personal accessories (down 4.8%), etc.

Exhibit 2: Trend in Total Retail Trade Sales ($bn), Volumes

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 the domestic as well as international tech- e-commerce companies, launch of brands and stores. The broader consumer discretionary sector is exposed to disruptions in the supply chain, increased labour shortages, higher inflationary environment, etc. Apart from these challenges, the general economic conditions in the markets and volatility in certain segments could impact the performance of the consumer discretionary sector and the companies operating in the sector.

Also, increased financing costs could impact the profit margins of the consumer discretionary companies.

Exhibit 3. Key Risks in Retail & Consumer Sector:

Source: Analysis by Kalkine Group

Outlook:

The New Zealand-United Kingdom Free Trade Agreement (or NZ-UK FTA) entered into force on 31 May 2023. The NZ-UK FTA helps in delivering NZ preferential access to the UK’s $3 trillion consumer market for the 1^st time since the UK made the entry in the EU 50 years ago. NZ goods exports to the UK are expected to increase by more than 50% at full implementation, which is anticipated to support NZ’s real GDP by between $700 Mn and $1 Bn by 2040. Over time, the UK would be eliminating all the tariffs on NZ exports, with 99.5% of current goods trade to the UK duty free. Notably, at least $25 Mn of wine tariffs per annum as well as $6.3 Mn of honey tariffs per annum were removed immediately.

The FTA has been modernising as well as streamlining export conditions for food and fibre sector trade, which consists sanitary and phytosanitary processes, and reduces the technical barriers on trade in wine and spirits. Wine export revenue is expected to be supported by massive harvest in 2022 as well as resilient pricing despite the sharp increase in supply. The US is the leading export market with robust growth YoY. The US market is accounting for 36% of wine exports as well as $868 Mn in the year ended March 2023. Notably, this market alone could surpass $1 Bn within the next few years.

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 ) Foley Wines Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 80.19 million, Annual Dividend Yield (TTM)¹: 4.56%)

Business Description: FWL is in the wineries business and holds iconic wineries and brands from New Zealand’s most acclaimed wine regions.

Outlook:

FWL reported record case sales as well as operating profit in FY 2023. It has worked to build an exceptional wine portfolio, with ‘blue chip’ routes to market on the basis of clear premiumisation strategy. FWL is in good shape and continues the robust growth and investment for the future.

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Technical Commentary:

On the daily chart, FWL prices are trading above the horizontal trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~38.079 level. However, the prices are trading below trend-following indicator 21-period SMA, which may act as a resistance level. An important support level for the stock is placed at NZD 1.13 while the key resistance level is placed at NZD 1.34.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.220 per share, down by 2.40% as on 31 August 2023.

2) Cooks Coffee Company Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 10.6 million)

Business Description:

Cooks Coffee Company Limited (NZX: CCC) owns the international intellectual property as well as master franchising rights to the Esquires Coffee brand globally (excluding ANZ).

Outlook:

CCC witnessed robust growth throughout its estate during FY 2023, with its franchisees’ outlet sales in the UK up by 18% as well as up by 41% in Ireland. It has 2 robust brands and an exciting pipeline of opportunities. FY 2023 showed the benefits of the resilience of the company’s franchise model and the importance of establishing the recurring revenue streams. Through the opening of additional outlets and the support provided to CCC’s existing network, the company is planning to grow current base and continue to build strong network of quality outlets.

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Technical Commentary:

On the daily chart, CCC prices are trading above the falling trendline support zone and taking support from the trendline. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~3.015 level. However, the prices are trading below trend-following indicator 21-period SMA, which may act as a resistance level. An important support level for the stock is placed at NZD 0.174 while the key resistance level is placed at NZD 0.210.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.190 per share, down by 13.64% as on 31 August 2023.

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 August 31, 2023. 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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