Which ASX retail stocks are at risk of having a poor Christmas in 2022?

The best time of the year for ASX retail stocks is typically Christmas, due to the higher level of shoppers.

But in recent years, Christmas has lessened in importance due to Black Friday. And as City Chic (ASX:CCX) showed earlier this week, there is the risk that consumers might cut back their spending this year amidst high inflation.  

SO, the question for investors is … which ASX retail stocks could deliver their shareholders a nasty surprise this Christmas?

 

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Better to be a staple than discretionary

A couple of years ago, American author and marketing professor Scott Galloway said that if a retail company is discretionary, it is more discretionary than ever.

But on the other hand, if a retailer is essential, it is more essential than ever. We think this saying will ring true to ASX retail stocks this Christmas.

 

Which discretionary ASX retail stocks are at risk?

Earlier this week, CBA released data on credit and debit card spending up to December 16. While spending held up well throughout 2022, including Black Friday, there was a big fall in retail spending.

The bank singled out alcohol goods, general retail, clothing and footwear as all seeing very large falls in spending growth.

 

Which discretionary ASX retail stocks are at risk?

The fall in clothing spending has already hit City Chic (ASX:CCX). We see several other stocks at risk, including clothing stocks Best and Less (ASX:BST), Premier Investments (ASX:PMV), Myer (ASX:MYR) and Universal Store (ASX:UNI), along with footwear retailer Accent Group (ASX:AX1).

A fall in alcohol spending could impact companies such as Treasury Wine Estates (ASX:TWE), Gage Roads Brewing (ASX:GRB), Endeavour Group (ASX:EDV) and Maggie Beer (ASX:MBH). 

Even supermarket retailers Woolworths (ASX:WOW) and Wesfarmers (ASX:WES) may not be immune. This is because both companies own discount general retailers – Woolworths owns Big W, while Wesfarmers owns Kmart and Target. 

 

Could 2023 be better?

ASX retail stocks and their investors may be hoping for better times in 2023. But it won’t be a good start unless there is an uptake in spending prior to Christmas.

And how ASX retail stocks fare will largely depend on the RBA rate hiking cycle. The RBA isn’t sure whether or not the job is done, but it may have gone too far already.

Economist Stephen Koukoulas argued on Twitter earlier this week that if CBA credit card spending is reflective of the economy as a whole, the December quarter will represent a sharp fall in retail spending. And bear in mind the March quarter is typically weaker as consumers deal with their financial ‘hangovers’ from Christmas spending.

 

A weak Christmas will be a shock for investors

If the Christmas period is weaker for ASX retail stocks, investors will be shocked. This is not just because the companies have provided guidance indicating a stronger period, but because consensus estimates forecast growth for many of these stocks.  

For instance, analysts covering Universal Store expect 26% EBITDA and EPS growth across FY23. Best and Less has even higher growth predicted: 83% EBITDA growth for FY23.

But it was only a few weeks ago that consensus estimates for City Chic suggested 10% EBITDA growth. This week’s update from the company has led to consensus EBITDA not just declining, but becoming negative. 

We’re not suggesting other ASX retail stocks could see their profits evaporate completely. But we think investors should be cautious about how the upcoming Christmas shopping period will go for their companies.

 

 

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