Retail is unlikely to face the headwinds being forecast post-COVID, according to Airlie, as firms take the opportunity to renegotiate store leases.
Retail had an outstanding year despite the pandemic as consumers saw increased household savings and were unable to spend money on travel which led to them spending more on items such as homewares and renovation work.
In an investment update, Vinay Ranjan, investment analyst at Airlie, said while markets were unlikely to replicate the outperformance of 2020 there was still reason to be optimistic.
The firm had invested in stores like Nick Scali, Peter Alexander (owned by Premier Investments) and Wesfarmers in the Airlie Australian Share fund. These had returned 82%, 66% and 38% respectively over one year to 7 August, 2021, versus returns of 30% by the ASX 200.
Share price performance of Wesfarmers, Nick Scali and Premier Investments over one year to 7 August 2021
“Investors seem overly focused on the challenges retail is facing, consensus is forecasting Nick Scali earnings to fall by 25% next year and then remain flat for the following two years,” Ranjan said.
“We don’t think that will happen. Long term, they are expanding stores to increase from 60 to over 85 stores and we think it is incredibly unlikely they will increase their store footprint by 40% yet sees earnings fall by 25%.
“Another factor is retailers typically tend to have less capital expenditure so when they are seeing super normal profits like they are now, they are able to preserve that cash and sit on a net cash balance sheet. They can return it to shareholders for buybacks and special dividends and we look forward to that activity.”
He also highlighted some retailers had taken the opportunity of a slower period to renegotiate leases which would have a beneficial effect on their balance sheets in the future.
“If you look at Premier Investments, the board took the opportunity to renegotiate leases and were able to use their bargaining power to exit an unprofitable lease, to cap rents or to switch their rental agreements based on a percentage of sales,” Ranjan said.
“Some of the rental expenses have gone from 18% of sales to 12% which is a remarkable outcome and a great reminder of backing exceptional management teams.”
