UBS takes the axe to JB Hi Fi, Harvey Norman and other retail earnings as the downgrade cycle starts

Veteran UBS retail analyst Shaun Cousin has taken the ax to earnings forecasts, cutting his 2022-23 earnings per share (EPS) estimates for non-food retailers by 23 per cent on average.

Big box electronic retailers Harvey Norman and JB Hi-Fi were hardest hit, with their 2023 net profit forecasts cut 42 per cent and 21 per cent respectively.

Solomon Lew’s Premier Investment’s 2023 EPS was cut 33 per cent, while Super Retail Group was marked down by 18 per cent. Footwear chain Accent group, women’s fashion group City Chic and jewelery chain Lovisa had 2023 profit forecasts cut by 25.5 per cent, 26.1 per cent and 8.6 per cent respectively.

“The external environment has deteriorated dramatically such that our more mixed view of the consumer is no longer justified and a more bearish view is required,” Cousins ​​says.

It’s not just that spending might dry up as consumers face higher mortgage repayments, food and fuel inflation and the impact of falling house prices.

Costs are clearly rising across the sector, with the minimum wage decision likely to push wage bills higher. And Cousins ​​is particularly concerned about the amount of inventory retailers have built up to deal with supply chain issues.

Slowing demand may leave retailers with too much stock; even those who’ve managed inventory well might be forced to lower prices if overstocked competitors start discounting.

Mining is another sector where downgrades are starting to mount. Shaw & Partners resources guru Peter O’Connor says four miners – West Australian gold minnow Dacian, global giant Glencore, WA gold miner St Barbara, and, on Thursday, WA gold miner, Ramelius – have downgraded in the last week.

All gave slightly different reasons, but there are some common threads, such as high labor costs because of COVID-19, supply chain pressures and a range of higher input costs including diesel, explosives, logistics and electricity. As highlighted by Queensland’s shock tax moves this week, higher royalties are another issue. O’Connor’s conclusion: there’s more to come.

This is a relatively small sample size of course, but the pressures Cousins ​​sees mounting for consumers, and the rising costs faced by miners, will be felt in other sectors.

Moreover, ASX earnings forecasts are ripe for surprises. Morgan Stanley’s local equity strategist Chris Nicol points out that about 120 companies in the ASX 200 have not had their earnings forecasts updated since the February reporting season, and about 43 per cent of ASX 200 firms have earnings estimates that are more than 80 days old.

To put it mildly, a fair bit has happened in the global and local economy since early April (that’s 80 days ago). So we are likely to see both analysts re-examining their EPS numbers and more companies confessing to weaker results.

The US quarterly earnings season, which starts next week in earnest, could provide another catalyst for downgrades.

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