UBS equity analysts have assessed which Australian retailers are most exposed to competition from Amazon.
The UBS team set out their buy/sell recommendations for Australian retail stocks, taking into account the Amazon effect.
The bank’s forecast revisions to earnings for incumbent Australian retailers range between cuts of 1% to 20%. Here’s the table:
The results show that UBS has reduced its price target for each stock on the list, but JB Hi-Fi is the only company with a change in rating – from Buy to Neutral.
The bank maintained its Buy recommendations for Harvey Normam, Super Retail Group and Woolworths. It stayed Neutral on Wesfarmers while maintaining a sell rating on Myer and Metcash.
UBS’s forecasts factor in price competition as well as the costs of building new infrastructure to compete with Amazon’s online service capabilities.
The bank’s equity analysts said that the sectors most vulnerable to Amazon’s market entry were electronics, sports and apparel/toys.
They said that the hardware, automotive and grocery sectors would be less impacted as they require a higher level of service and Amazon has an inferior product range in those areas.
“Of the listed retailers, we believe Myer, The Reject Shop, JB Hi-Fi and Super Retail Group are the most vulnerable to AMZN from both a ‘sales’ and ‘cost’ (need to invest) perspective,” UBS said.
This table shows the comparative downgrades to listed retail stocks that Morgan Stanley issued in their report dated June 1:
Morgan Stanley’s assessment of Amazon’s threat to other retailers was broadly similar to that of UBS, and the bank issued revised share price targets which were uniformly lower.
Both banks agreed that department stores such as Myer are particularly vulnerable. However, the two banks had a divergent view about the prospects for retail conglomerate Wesfarmers.
While UBS remained neutral on the stock at its current level just above $40, Morgan Stanley downgraded its price forecast to $36 from $41, with a bearish scenario in which Wesfarmers shares could fall to $30.
“What strikes us is that the stock of the largest non-food retailer in the Australian market — Wesfarmers, which generates $22 billion in sales and $2 billion in profits from non-food retailing — has barely moved,” Morgan Stanley wrote in June.
Wesfarmers owns food retailer Coles, along with Kmart and Target. Morgan Stanley said that Kmart had the most to lose from Amazon’s arrival, given that core product range is in direct competition.
However, UBS argued that Amazon poses a bigger threat to department stores such as Myer, and those product ranges only make up about 10% of Wesfarmers’ total sales.
The UBS analysts forecast that Amazon will generate sales of $3.5 billion by the 2023 financial year.
Morgan Stanley projected a further three years out and was even more bullish in its forecasts.
“We think that Amazon could generate $12 billion of sales by FY26 from just five distribution centres in Australia – Sydney, Melbourne, and Brisbane,” Morgan Stanley said.
UBS looked at case studies of how Amazon has entered into other international markets, which showed that the business model places a key focus on setting up Amazon’s online presence.
This table shows how UBS expects Amazon to grow its online footprint.
Despite well-documented fears about the competitive threat from Amazon, UBS said there had been a market overreaction for some of Australia’s listed retailers.
This chart shows which companies have seen an overreaction, as well as stocks more susceptible to direct competition from Amazon:
Stocks on the wrong end of the market overreaction were either more diversiifeid (Harvey Norman, which only derives 44% of revenue from Australian retail) or in retail sectors where the impact from Amazon would be less severe (sports and automotive).
Stocks in the under-reaction category, such as Myer and JB Hi-Fi, had seen significant price falls, but the direct threat posed by Amazon in those sectors mean that current valuations don’t fully reflect the downside risks.
Morgan Stanley’s picks for Australian consumer stocks that will be able to fend off the Amazon threat are Domino’s Pizza and Treasury Wines.
The bank said that both companies are not in direct competition with Amazon and generate a large portion of earnings from offshore.