ABS data released last week may be impacting on the JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Ltd (ASX: HVN) share prices.
JB Hi-Fi and Harvey Norman are Australia’s largest electrical and white goods retailers, selling products ranging from headphones to washing machines. Harvey Norman operates in eight different countries and JB Hi-Fi owns the popular electronics store The Good Guys.
What does the ABS data show?
The ABS data released last week showed an increase in retail sales in February of 0.8%, beating expectations of 0.2%. However, this follows two disappointing months after a gain of only 0.1% in January and a fall of 0.4% in December 2018.
Despite a 0.8% rise looking positive, most of this increase came from food retail, which was up 0.4%. JB Hi-Fi and Harvey Norman likely did not experience the same increase, with household goods retailing down 0.2%.
What happened to the share prices?
Both companies have been experiencing share price growth over the last three months, with JB Hi-Fi up more than 16% and Harvey Norman shares up more than 21%. However, since April 1st, both share prices have seen a slight pull-back.
Harvey Norman shares have lost 7% since the beginning of the month, while JB Hi-Fi shares are down 2.7%. Whether this is a temporary pull-back or a sign that the share prices can’t keep growing remains to be seen. JB Hi-Fi released its 1H19 report in February, reporting an increase in sales of 4.2% and an increase in NPAT of 5.5%.
Harvey Norman reported a profit before tax (PBT) increase of 7.5% and an increase of 6% in basic earnings per share. These results have been the reason for the rise in the two companies’ share prices, but lower retail sales data might dampen the outlook for the next few months.
Harvey Norman has a slight edge
It might be expected that lower retail sales in Australia would impact JB Hi-Fi more than Harvey Norman. The reason is that JB Hi-Fi makes almost all of its revenue in Australia, with a handful of stores in New Zealand. Harvey Norman, on the other hand, operates in eight countries and 1H19 saw over $1 billion in offshore sales for the first time ever.
This diversification gives Harvey Norman the advantage if retail sales and consumer confidence start to decline in Australia.
Summary
Both companies are operating in a tough industry with low margins and potential for intense competition from the likes of Amazon.com Inc (NASDAQ: AMZN).
While both were able to continue growing through 1H19, fears of a recession seem to be growing which usually leads to lower consumer confidence and lower retail sales. This could have a big impact on both companies. For now, I would be avoiding investing in companies providing high-cost discretionary goods. I would rather invest in one of the three companies mentioned in the free report below…
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
