Several S&P/ASX 200 Index (Index:^AXJO) retail stocks have been the surprising outperformers during the COVID-19 pandemic. But Citigroup warns they could be about to lose their mojo.
There are a few reasons why these retailers have outperformed even as the coronavirus outbreak forced a shutdown of the economy in March.
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Retail winners from COVID-19
Some like the Wesfarmers Ltd (ASX: WES) share price benefitted from increased demand for home improvement projects. Others like the JB Hi-Fi Limited (ASX: JBH) benefitted from strong demand for IT equipment.
The big shift to online shopping also meant that web-based retailers, such as the Kogan.com Ltd (ASX: KGN) share price, are booming.
Those that sell exercise wear have also seen a quick rebound with consumers locked out of gyms and having to work out on their own. These stocks include the Accent Group Ltd (ASX: AX1) share price and Super Retail Group Ltd (ASX: SUL).
Losing momentum
However, Citigroup is splashing cold water on this parade and warned that the momentum could fade.
"Retail sales conditions have been strong, but are likely to slow from here, which makes retail share prices susceptible," said the broker.
"The fade in sales growth may be quicker if government stimulus is wound back and the super withdrawal declines more rapidly.
"The economic update provided by the Federal Government on 23 July 2020 will be important and we see downside risk to consensus earnings if total stimulus is less than $50 billion for the December quarter."
Consumer cashflow about to be hit
But it isn't only government stimulus that has helped sustain consumer spending. The early superannuation withdrawal scheme also fuelled spending, and this program isn't likely to be extended.
The scheme allows consumers to make tax-free withdrawals of $10,000 in FY20 and another $10,000 this financial year. Applications for early withdrawal spiked this month as Melbourne went into a second lockdown.
While the program is meant to help applicants in hardship pay for the basic necessities, there's evidence that many have been using the cash on discretionary items. Many of these applicants also probably do not know about the hidden danger of accessing the program.
But rightly or wrongly, Citi estimated that the end of this withdrawal program will cut household cash flow by between 3% and 6%.
Risk of consensus downgrades
"Retail spending has also done well because money was freed up by an almost halving in non-retail discretionary spend (the fall in tourism, auto and entertainment are key factors)," said the broker.
"We expect these areas of spend to gradually recover, impacting retail sales growth over the next year."
For these reasons, Citi thinks the sector could be on the cusp of a consensus downgrade cycle with earnings per share forecasts set to fall by up to 6% for discretionary retailers.
Those that are more susceptible to slowing sales are department stores Target (owned by Wesfarmers) and Myer Holdings Ltd (ASX: MYR).
