New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Retail Sector Re-tail Risk: Which Companies Could Catch a Cold During an Economic Winter?


Recessionary risks appear to be rising and with retailers ultimately&nbsp;reliant on the spending habits of consumers, periods of economic weakness can meaningfully affect the bottom line; but the market may be overly cautious — retailers share prices have on average declined&nbsp;-21% since late last year.&nbsp;We analyse historical data and leverage our understanding of each retail company under coverage in an attempt to quantify the&nbsp;relationship between GDP and earnings. We find KMD Brands (KMD; OUTPERFORM) and The Warehouse Group (WHS, OUTPERFORM) are the most exposed to the economic cycle. On the other hand&nbsp;Restaurant Brands (RBD; NEUTRAL) and My Food Bag (MFB; no rating), operating in staple segments are likely to be more resilient. We recognise that a degree of&nbsp;caution is warranted&nbsp;as consumers look&nbsp;likely to face increasing costs of living and tighten&nbsp;discretionary spending. However, our&nbsp;calculations suggest the market may already be pricing in a downside scenario, allowing for: (1) a -22% decline in&nbsp;WHS's&nbsp;one-year forward NPAT which equates to a scenario where GDP declines -2%, and (2) for&nbsp;KMD's&nbsp;one-year forward NPAT to decline a further -14% from pandemic-interrupted levels.&nbsp;



Consumer headwinds ahead against a weakening macro backdrop?


Household living costs have risen by +7% for the year ended March 2022, with inflation most prevalent in categories such as food and transport, making it difficult for households to escape. Households will also quickly feel the impact of rising interest rates. In June 2021, 79% of mortgage debt was due for re-pricing within a year (as at May 2022 this had fallen to 58%). We estimate that New Zealanders would pay an additional NZ$5.9b in mortgage interest costs if all mortgages were repriced in May 2022 versus June 2021. Despite this, with consensus expectations for domestic GDP to grow by +4% year on year through 2H22 and by another +3% next year our base-case view is for no recession, though we recognise risk is to the downside.&nbsp;


Sensitivity to the cycle


We assess the sensitivity to the economic cycle of retail companies under our coverage using three factors: (1) change in sales, (2) gross margin movements, and (3) economic leverage. We find that KMD and WHS are the most sensitive to the cycle (we estimate NPAT shifts by +/-18% and +/-15%, respectively, for a +/-1% change in GDP). KMD's geographic diversity and already pandemic-impacted earnings may provide an offset and The Warehouse's sales (&gt;50% of sales) are likely less sensitive to the cycle than Warehouse Stationary, Noel Leeming or Torpedo7. MFB and RBD are likely to be more resilient to the cycle (we estimate NPAT for both companies shifts by +/-11% and +/-9%, respectively, for a +/-1% change in GDP). Quick service restaurants have a proven track record during economic downturns, but how consumers respond to meal-kits remains uncertain.


Retail Sector: Re-Tail Risk: Which Companies Could Catch a Cold During an Economic Winter?

Kathmandu Holdings

Retail Sector: Re-Tail Risk: Which Companies Could Catch a Cold During an Economic Winter?