Aussie retailer JB Hi-fi is known for selling CDs and DVDs, but it’s also seen as a bellwether of Australia’s economic well-being.
Due to the nature of the consumer goods it trades, the ASX-listed company’s results are seen by analysts as a test of the level of consumer confidence.
Retailers have been mired in negative news of late, with falling consumer spending, the property downturn and online competition all weighing heavily on the sector.
So JB’s latest profit results Monday presented an unexpected relief, with its half-year profit results beating expectations to rise 5.5 per cent.
But though it’s good news, some analysts believe the reality for retailers is far less positive.
“The problem that we’ve got with investing in retail right now is that we don’t know how deep the downside is, and that’s the issue,” fund manager Roger Montgomery of Montgomery Investment Management told Trading Day.
“So we’ve got flat salaries, we’ve just had the RBA last week cut the GDP from 3.25 per cent to 2.75 per cent.”
Montgomery says to get a better picture of the future health of Australia’s big retailers, we need look no further than house sales.
“We know that the monthly number for January’s new house sales is back to 17-year lows. So you go all the way back to 2001 and you won’t find a lower number than what we saw in January,” Montgomery said.
House sales and retail sales are linked because when people buy new properties they typically fill them with new appliances.
Any fall in new home sales will usually be closely followed by an overall drop in retail, Montgomery explains, but not for at least another 10 months or so.
That means the effects won’t yet be felt by Australia’s retail sector.
Last week, the drop in consumer spending was flagged as one of the key risks to Australia’s prosperity by Reserve Bank of Australia (RBA) governor Philip Lowe.
He said Australians have been hanging onto their money for longer with spending having long-remained flat, depriving the economy of added stimulus.
In Montgomery’s view, Australia is entering a deleveraging phase, which means that people begin to spend less.
“We’ve got consumer debt at record highs, we’ve got household debt-to-income at record highs, record credit card debt, record car loan debt…” Montgomery explains.
“We saw, for example, plunging retail figures in January, plunging foot traffic in January… the numbers aren’t getting better and I don’t think that’s caught up with the best quality retail companies.”
With overall retail numbers continuing to underperform as a whole, it’s a sentiment that senior economist Diana Mousina of AMP capital agrees with.
“We expect further weakness because of the hit to housing wealth,” she told Trading Day.
However broken down further, she says there are some pockets of strength – such as services, restaurants and cafes.
“Consumers are still spending, they’re just being quite selective about what they’re spending they’re money on. So areas like department stores, clothing and footwear, that’s obviously quite soft at the moment.”
Watch the discussion in the video above.