Weekly Broker Wrap: upside for household goods; outlook for the Australian consumer; SMEs doing it tough; and preferred stocks within the furniture & hardware category.

-Upside for the Household Goods sector in FY25
-Conditions and confidence levels for the Australian consumer, small businesses
-Jarden's preferred stocks in the Furniture & Home category

Upside for the Household Goods sector in FY25

Jarden sees a more positive macroeconomic outlook for the Household Goods sector into FY25, with hardware set to outperform other categories as it is skewed towards early-stage housing development, followed by furniture and electronics that are driven more by the replacement cycle.

An around ten-month pipeline for construction will provide the early stage development activity to boost hardware, explains the broker.

Rising house prices are expected to help underpin a big lift in spending for the Household Goods sector, along with repair & remodel (R&R) activity, cycling of weaker new housing, and easing interest rates.

To explain why hardware benefits first when housing sentiment improves, Jarden point to the less than five-month historical lag between property values and hardware, with a further two-to-three-month lag between the hardware upswing and furniture sales.

Metcash ((MTS)) and Wesfarmers ((WES)) represent the best exposure to hardware, note the analysts, with Beacon Lighting ((BLX)) benefiting next due to mid-stage housing development. 

For furniture, Nick Scali ((NCK)) is preferred while Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) are best for exposure to appliances/electronics. 

The broker cautions underestimated changes are looming for major household goods operators in Australia, including: more choice as brands increase direct businesses and Amazon grows; price competition from new suppliers; and last mile delivery led by Amazon requiring incumbents to lift capex, review embedded delivery terms and re-engage suppliers.

Jarden leans toward companies less exposed to the competitive threat posed by Amazon's entry into bulkier items such as Wesfarmers, Nick Scali, Metcash and Beacon Lighting.

Across the household goods space, the broker retains its preference for Metcash, Temple & Webster ((TPW)), Nick Scali, and Beacon Lighting.

Conditions and confidence levels for the Australian consumer and business 

Australian consumer confidence and sentiment levels will pick-up materially over the second half of 2024 as Stage 3 tax cuts provide a strong boost to household disposable incomes, anticipates ANZ Bank. Otherwise, there will be downside risk for the bank's current household consumption and GDP growth forecasts, perhaps leading to a more aggressive interest rate cutting cycle.

The bank attributes current weakness in consumer confidence to falls in real (adjusted for inflation) per capita household income. This income measure declined by -2.2% over 2023, with the pace of decline broadly mirroring the low level of consumer confidence as measured in the ANZ-Roy Morgan Australian Consumer Confidence survey.

Consumer sentiment is partly a function of inflation, interest costs, tax payments and the unemployment rate, all which impact on household disposable income, explains ANZ. Hence, the expected boost to sentiment from upcoming tax cuts.

Equity market performance and recent sentiment also impact on consumer sentiment, with the latter highlighting a degree of persistence to high or low levels of sentiment, notes the bank.

ANZ Bank currently forecasts three interest rate cuts of -25bps over late-2024 and the first half of 2025.

Regarding small and medium-sized enterprises (SMEs), business conditions for these firms fell further below average in the March quarter as slowing demand and declining profitability weighed.

Business confidence also remained negative in the March quarter among SMEs, according to National Australia Bank's quarterly SME survey, though there was a small improvement in business confidence when compared to the last quarter of 2023.

Conditions for SMEs have now clearly diverged from the resilience reported by larger firms in the bank's Quarterly Business Survey, with conditions for the smallest firms remaining negative and mid-tier SMEs (with $3-5m annual turnover) also experiencing a considerable decline.

Outside of Western Australia, SME conditions were weak, falling in Victoria and NSW, while there were small rises elsewhere.

Availability of labour remained a significant constraint for one third of those surveyed, and price growth was broadly unchanged from the fourth quarter of 2023.

While still in negative territory overall, the survey shows SME business confidence rose in all industries except accommodation & food, with confidence still weakest in retail.

Overall, firms are still under pressure on costs, and with conditions continuing to ease for SMEs, the scope to pass through these costs to consumers is clearly increasingly constrained, notes Group Chief Economist Alan Oster.

Providing some hope for the near-term, leading indicators firmed a little, with forward orders and capex rising, while capacity utilisation eased slightly.

Jarden's preferred stocks in the Furniture & Home category

Furniture & Home (F&H) companies have been more resilient in Australia by comparison to the US, observes Jarden, and have potential upside as new house listings increase. In the US, this category has declined because of a fall in housing churn to levels experienced during the GFC.

The broker's April 2024 Furniture and Home Quarterly reveals a mixed performance by value brands in Australia, but aspirational brands (offering a more accessible price point) performed well for the March quarter, suggesting high income earners are still spending, but are also searching for value. 

Jarden's F&H Footfall Traffic Index, which tracks the foot traffic of 15 specialist omnichannel F&H retailers, was weak in March and shows Neutral-rated Adairs ((ADH)) and Harvey Norman lost footfall share.

Adairs had the weakest foot traffic in March (experiencing an around -9% fall) with -2% less foot traffic at the company's bedding retailer (Focus on Furniture) contributing to the overall decline.

Rated by Jarden as Buy and Overweight, respectively, Temple & Webster and Nick Scali once again gained market share year-on-year in March and April. 

Nick Scali's foot traffic rose by 3% year-on-year with traffic for the recently acquired sofa merchant Plush rising by 11%.

Furniture remains a store-driven category, explains Jarden, with scale omni players such as Nick Scali and Harvey Norman well placed to take share as industry consolidation continues, while Temple & Webster is considered the scale F&H specialist. 

Temple & Webster's recent share price weakness is disproportionate to the company's recent momentum in web traffic, notes the broker. The company increased its web traffic share by 3.5% year-on-year in the March quarter.

For 2024, Jarden sees a balance between increased discounting risk and cost-of-goods-sold (COGS) tailwinds for the F&H category. There is currently no significant evidence of irrational discounting, while decreases in COGS are likely to be passed through to consumers to stimulate demand and take share.

Jarden likes (in order of preference) Temple & Webster, Nick Scali, Harvey Norman and Adairs.

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