RETAIL IN THE POST-COVID WORLD - Consumer Trends, Online Transitioning, and AI - Emerald Financial
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RETAIL IN THE POST-COVID WORLD
Consumer Trends, Online Transitioning, and AI
Alfred Chan | Emerald Financial Group | admin@emeraldfinancial.com.au | (03) 8080 5777
Date: 11 September 2020
Since the commencement of the coronavirus pandemic in 2020, one
Stocks Covered:
of the industries most heavily affected has been the retail sector, where
lockdowns have resulted in generational changes as to how populations
buy goods.
Changes to consumer trends brought upon by COVID-19 will have long-
lasting effects on ASX retail stocks where corporate responses to the
pandemic have either set companies up for long-term growth, or resulted
in fundamental setbacks which will take years to recover from if they can
stay in business.
Beyond the fact that lockdowns forced Australian retailers to shut brick-
and-mortar retail stores through the pandemic, those that embraced
the transition towards online channels have seen a notable increase in
operating margin, the source of profit within the retail sector. Where some
retailers were kept on life support with the assistance of Government
schemes such as JobKeeper, FY20 reporting offered insights into which
retailers are best positioned for the post-COVID world. An environment
where consumer trends across value, discretion, payments and patterns
look drastically different to 12 months ago, with adoption to internet-
based technology, marketing and artificial intelligence to set retail
companies apart going forward.
In reviewing retail stocks through the August Reporting Season, Emerald
Financial identified various trends within consumer discretionary stocks
which are poised to emerge from COVID-19 in a better fundamental
position than before.
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Kogan.com (ASX: KGN) - Buy
Having emerged as a tech darling of the ASX
with its share price reaching an all-time high
during the peak of the pandemic, Kogan was
undoubtedly best positioned for this type of
disaster, being an online retail pure play.
At no point during its time in Australia since
being listed on the ASX in 2016 at an IPO
Offer Price of $1.80 per share has Kogan had
any exposure to retail stores, outside of their
acquisition of embattled retailer Dick Smith and
its customer database, a turning point for The
Company.
With their online retail product offering centred
around technology products, the shift towards
working-from-home saw sector-wide share
price gains for tech retailers. Kogan’s share
price traded as low as $3.45 in March before
staggering a remarkable rise up to reach its
all-time high of $22.90 in August. It’s a remarkable story for the company which when founded in 2006 had a
product range of just two LCD televisions.
This was driven by the prevalence among Australians to purchase their home office goods online where Kogan
was able to offer better value to customers largely due to their lack of retail overheads carried by competitors.
Subsequently, there was a 40% increase in new customers returning within one month for a second purchase
from Kogan.com.
It resulted in $786.9m in FY20 sales which represented a 39.3% increase on the prior year. This was further
consolidated by NPAT of $26.8m, a 55.9% increase.
Despite offering its products solely online, the year also delivered a 470 bps increase in operating margin from
20.7% to 25.4%, a 23% net increase in margins.
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The year also saw Kogan increase its active customers from 1.6 million to more than 2.1 million, which will
have lasting ramifications on competitors as online retail adoption gives them lifetime spending value from their
tech products. However, the greater interest is the horizontal product line growth Kogan has developed which
can be directly marketed to their active customer base.
These include financial products such as credit cards, insurance and superannuation, as well as services
including mobile, internet, energy and travel. This product and service expansion is most akin to that which
has proven immensely successful in the United States by Amazon, the business model Kogan.com is heading
towards in Australia.
JB Hi-Fi (ASX: JBH) - Neutral
As a long-time market leader in the audio-visual and technology retail space, JB Hi-Fi has been Australia’s
most responsive retailer to changing consumer trends, having come a long way from just selling CDs and
walkmans.
The Group, which consist of its flagship JB Hi-Fi brand as well as The Good Guys, have also reported strong
trading through the pandemic, aided by their home office product ranges and online retail channels alongside
their retail network of 314 locations (195 JB Hi-Fi Australia, 104 The Good Guys Australia, 14 JB Hi-Fi New
Zealand).
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Executing the strategy of offering ‘the best brands at low prices’, the Group reported an 11% increase in FY20
sales revenue to $7,918m which represented an 11% increase on the previous year and $302.3m NPAT, an
33.2% increase.
Of the most interest through the three divisions
is JB Hi-Fi Australia’s performance, where the
division reported $5,398m in sales revenue,
which represented a 12.5% increase, at 21.98%
gross margins - a minor decline of 16bps.
Representing 68% of the Group’s revenues, the
JB Australia division was the Groups strongest
performer through the pandemic, whilst The
Good Guys performance was admirable,
increasing revenue by 11.2% to $2,388m at
20.52% margins while New Zealand revenues
fell 5.7% to $222.8m at 16.54% margins.
Due to a significant increase in revenue from
their Australian operations, the Group did not
receive any of the Australian Government’s
JobKeeper subsidy through COVID-19, however
did receive NZD $3m from New Zealand’s
corresponding scheme.
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While its retail store network has long underpinned the JB Hi-Fi brand image, online sales delivered $597m
which represented 7.5% of the Group’s total revenue, an increase of 48.8% of previous year, highlighting the
stronger performance of their retail stores which are the preferred purchase medium for JB customers.
Shares in JB Hi-Fi have similarly performed very well through the pandemic, having recovered beyond its pre-
COVID levels. However, the Group has significant exposure to Victoria’s extended lockdowns where 46 JB Hi-
Fi and 21 The Good Guys locations have been temporarily closed for six weeks as per Government directives.
It is worth noting that the company has not flagged any new store opening plans,with the Group’s network
size falling by one location in FY20, but has committed to trialling new store formats for its JB-Hi Fi stores.
Declaring a focus on expanding their communications and connected tech and improving their online retail
experience, the Company appears to be angling firmly towards a world where working-from-home is the
norm. How quickly that number of 314 store locations decreases over the coming year will highlight the true
impact of the pandemic on JB Hi-Fi, where foot traffic in the post-COVID world will be significantly impacted by
poorer-performing retailers.
Adairs (ASX: ADH) - Moderate
Buy
Unlike its technology counterparts in the retail
sector, Adairs has been the surprise performer
through COVID-19, with its homemaker-focused
discretionary products primarily sold through
a large retail network which through the year
opened 4 new stores, upsized 4 and closed 3.
Where tech retailers thrived off the working-
from-home trend, Adairs has more generally
seen an uptick in sales as Australians seek
comfort while spending significantly more time at
home amidst the pandemic.
For FY20, Adairs reported an 12.9% increase in
sales to $388.9m where online sales accounted
for $124.2m, 34.8% of total revenue.
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Gross margins is the most interesting line within Adairs’ report where the Adairs brand delivered an increase
of 226bps to 61.4% - almost triple that of tech retailers. Subsequently, it delivered the Group $35.3m NPAT
which represented a 19% increase.
Alongside the notably high margins relative to the wider retail sector, ADH shares rode the strongest share
price gain through the pandemic so far, rising from $0.44 to close August at $3.48 - a 690% gain.
Despite the large retail network which was impacted by COVID-19 and entitled Adairs to $11.3m in JobKeeper
subsidies, the Group remains firmly committed to their retail network with plans to open new stores and upsize
20-30 of their existing 167 stores. The Group has a corporate strategy focused on short-term leases which
has Adairs well positioned to close under-performing stores in regions that can be more optimally catered for
by online services.
In preparation for this, Adairs has its online brand Mocka which it acquired in December 2019 as a purely
online play and a National Distribution Centre which is expected to be operational by July 2021 and deliver
annual Company savings of $3.5m. Margins
remain the strongest indicator to Adairs’
success where Mocka may see this metric take
a hit over the coming 12 months. However, this
will give the Group defensive protection from
COVID consumer trends and retain customers
affected by the closure of underperforming
stores where Adairs’ Linen Lovers loyalty
scheme has more than 800,000 members.
Baby Bunting (ASX: BUN) -
Moderate Sell
Delivering strong sales revenue through the
pandemic, Baby Bunting did not qualify for
JobKeeper subsidies, with the Company
emerging as a surprising performer through
FY20 despite a major debacle to their online
sales platform that resulted in a $3.2m
impairment from the failed launch of a new
website.
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Despite the setback, Baby Bunting delivered an 11.8% increase in sales revenue to $405.2m but NPAT fell
14% to $10m due to various write-offs including their website project.
While their online sales increased 39.1% where Click and Collect proved popular for the retailer, it only
accounted for 14.5% of total sales at $58.9m.
Gross margins remained strong to increase 120bps to 36.2% without any JobKeeper assistance which
remains the value driver within the baby and maternity products market where Australians have sustained
consumption of premium brands consistently.
Committed to their retail network strategy, Baby Bunting has announced plans to increase their retail network
to 100 stores, up from the previous target of 80 stores at a time when commercial real estate is struggling
immensely due pandemic-enforced emergence of online channels which deliver stronger margins.
Mosaic Brands (ASX: MOZ) - Sell
The most troubled of the ASX retailers coming out of Reporting Season, Mosaic Brands (ASX: MOZ) was
impacted by the pandemic more than other retailers due to extensive exposure to retail tenancies through their
store network for more than 1,300 locations.
The owners of fashion brands Noni B, Katies, Millers, Rivers, Rockmans and others made headlines prior
to their FY20 results release after Scentre Group (ASX: SCG), the operator of Westfield Group, temporarily
closed all Mosaic Brands stores within Westfield shopping centres after months of rental underpayment and a
breakdown in negotiations.
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W: www.emeraldfinancial.com.auAs a result, Mosaic was locked out of 129 stores
for 11 days until the matter was resolved but
the disruption wasn’t the first for 2020, with the
first wave of COVID-19 resulting in a six week
shutdown of the entire network in March, and
the 276 regional stores affected by Summer
bushfires.
While various brands within Mosaic’s ownership
already had online channels, fashion was one
area of retail which Australians showed minimal
interest under lockdown. Despite growth in their
online sales, it was not enough to cover the lost
foot traffic which resulted in a 16.5% annual
decline in revenue to $736.7m.
Although Mosaic received JobKeeper subsidies
of around $52m, it was not enough to cover the
macroeconomic effects which resulted in a net
loss of $170.3m through FY20.
Crucial to Mosaic’s recovery will be management of their retail network in response to changing
consumer trends. Fortunately for the Group, 41% of their locations will be on holdover or expiring by
December 2020, while 87% of the network leases will expire within 24 months.
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W: www.emeraldfinancial.com.auManagement has already flagged to the market that plans are in motion to cull underperforming stores where
up to 500 stores will close.
Beyond its store network, which was reduced from 1,379 locations to 1,333 in FY20, Mosaic also operates
9 online department stores which will be central to the Group’s online transition for customers lost from store
closures. This online transition has been a focal point in Mosaic’s long-term goals where they have actively
been seeking customer email addresses from in-store purchases, where the Group increased it’s online
database from 4.4 million customers to 5.2 million by the end of FY20.
Delivering $93.7m in sales for the year which represented 12.7% of total Group sales, Mosaic has flagged
entry into new product categories for their online department stores which are not available through their
fashion brands. These include camping & outdoor, pets, toys and garden.
Despite the incredibly difficult year, Mosaic holds $77.6m in cash, which gives the Group some headroom to
navigate tough trading conditions while awaiting lease expiries, their new digital department store product
expansion is seeking entry into an already competitive market but will be aided by Mosaic’s large established
database.
Crowd Media (ASX: CM8) - Speculative Buy
Online retail has been the common theme around how retailers will recover in the post-COVID world however
there are developments being made behind closed doors where artificial intelligence will play a major role in
how consumer goods are sold in the future.
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W: www.emeraldfinancial.com.auAt present, artificial intelligence within the online retail sector is limited to marketing algorithms that present
products which are likely to appeal based to specific customers, however, this is entirely one-way marketing.
Conversational commerce is an offshoot from eCommerce where Crowd Media (ASX: CM8) are deep in
development to bring conversational commerce to their network of more than 10,000 social media influencers.
The Company commenced a business
transformation in September 2019 alongside the
appointment of Steven Schapera as Chairman,
after he put together an investor group that
injected $2.7m into the microcap at the time.
The original founder of BECCA Cosmetics before
he sold the company to Estee Lauder in 2016 for
$300 million, Schapera has made it known to the
market that his primary reasoning for investing in
Crowd Media was the artificial intelligence tech
that the Company is developing.
Identifying a popular theme among millennials
- the target audience of Crowd’s online retail
products which include home goods, beauty
products, baby products and personal
care - Crowd’s artificial intelligence is being
developed into a ‘talking head’ which can have
conversations with customers in live time, and be
geared towards selling products. As part of the
value that management sees in this tech, Crowd
made a strategic investment in Forever Holdings to secure 8% equity in the tech partner which has developed
the talking head visual component that will be integrated into Crowd’s chatbot capabilities.
The concept focuses around influencers who receive hundreds of direct messages a day but do not have
the time to respond to them all, or call them back. By applying this tech, users can have conversations with
social influencers, and be marketed to, where responses are generated in live time using Crowd’s artificial
intelligence.
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W: www.emeraldfinancial.com.auSince Schapera’s appointment, Crowd has been building its stable of high-margin consumer products whilst
their business transformation delivered a $2.8m turnaround in the Company’s FY20 financials.
From $16.5m of revenue, Crowd reported a net loss of $1.9m, a substantial improvement on the prior financial
year’s $4.7m loss.
Most notable within their results was testing on their AI which is being piloted through their Q&A division
where the AI was able to handle 60% of customer enquiries. The Company is one year into their 3 Horizons
strategy where Schapera and his senior management team have cleared the Horizon one goal of building their
stable of consumer products, which are sold entirely through online channels, while returning Crowd to being
underlying EBITDA positive.
Whilst Crowd is planning to commercialise its AI conversational commerce tech in 2022, the Company has
plans to increase it’s retail offering into services in 2021. Prior to the pandemic, Crowd was preparing to launch
various travel and insurance products until COVID-19 stalled the rollout. Discussions are expected to resume
once travel returns to normal, however the Company’s senior management are also deeply entrenched in the
fintech sector which has been flagged for potential opportunities. CEO Domenic Carosa is also the Founder
and Chairman of Banxa - a cryptocurrency business set to list on the Toronto Stock Exchange.
With its considerably small market cap, Crowd Media is speculative in nature but the Company is advancing
artificial intelligence for retail purposes like no other company on the ASX which is why if successful, the more
established retailers will be playing catchup in the application of artificial intelligence in eCommerce.
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Alfred Chan is an Analyst for Emerald Financial, a Director of Principal Investor Relations (ABN: 51 633 750 928) and an
Authorised Representative of Emerald Financial Group ABN 85 106 823 741 which holds Australian Financial Services
License number 241041.
All Figures in this report were correct as of 11th September 2020.
Emerald Financial provides this financial advice as an honest and reasonable opinion held at a point in time about an
investment’s risk profile and merit and the information is provided by the Emerald Financial in good faith. The views of the
Analyst and/or Advisor do not necessarily reflect the views of the AFS Licensee. Emerald Financial has no obligation to
update the opinion unless Emerald Financial is currently contracted to provide such an updated opinion. Emerald Financial
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Disclosures
Emerald Financial has been commissioned to prepare content within this report. From time to time, Emerald Financial
representatives may hold interests, transact or hold directorships in, or perform paid services for, companies mentioned
herein. Emerald Financial and its associates, directors and employees, may, from time to time hold securities in
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Recommendation Rating Guide Total Return Expectations on a 12-mth view
Speculative Buy* Greater than +30%
Buy Greater than +10%
Hold Greater than 0%
Sell Less than -10%
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