Cost of living squeeze hits ASX: Margin contraction, China’s impact emerge as key themes

February 2024’s Reporting Season unearthed some key themes, trends and surprising results that caused mixed reactions among investors for the first half of FY24. Across the board, there were more broker downgrades than upgrades for companies, as less than half of Aussie-listed companies that reported beat expectations.

Coles beats expectations, Woolworths maintain market share lead

Investors awaited the release of Coles Group (ASX:COL) results in the latter end of reporting season to see how Woolworths’ (ASX:WOW) duopoly counterpart performed. While consumers anticipated the results release to see if price gouging is really happening at the hands of the two big supermarket giants, Coles reported underlying EBITDA rose 4.1% to $1.9bn, sales revenue rose 6.8% on the PCP, NPAT fell 3.6% to $594m and earnings per share declined 3.9% to 44.5cps.

Coles’ results were higher than expectations and shares in the supermarket giant rose 3.6% during the session on Tuesday, 27 February. Woolworths remains the market leader with a 37% market share in the Aussie supermarket sector, however, when comparing the first half results, the first half for Coles were impressive with Coles reporting revenue up 6.8% compared to Woolworths’ rise of 4.4%, and the second half has continued growth momentum for both supermarket leaders.

“As for the price gouging speculations, the ACCC will likely analyse both Coles and Woolworths’ first half results to determine whether Aussies are being ‘ripped off’ at the checkouts.”

James Hardie beats expectations, but outlook dampens investor sentiment

Expectations were high for James Hardie Industries (ASX:JHX) to extend its long growth run into Q3FY24, and the company produced further strong results that beat expectations in Q3 including record adjusted net income of US$179.9m, up 39%, adjusted diluted EPS of US$0.41/share, up 41%, and record nine months operating cash flow, up 73%, to US$749.5m.

Investors sold out of James Hardie with its share price plunging 5%, possibly due to the company’s outlook statement indicating that James Hardie’s largest market, North America, will decline 4% to 6% in CY24.

Big banks see profit amidst market competition

The big banks have experienced the peak of Net Interest Margins and are now collectively in the easing profits territory. This is due to increased switching of home loans, more market competition, and the outlook for interest rate cuts.

“Although the big four banks are still considered stable investments, they may have reached their peak in terms of growing investment value in the current macro environment.”

7 key themes from this reporting season

1. Margin contraction – Margin contraction is not an uncommon result reported this reporting season and has come from cost management inefficiencies in the high-cost macro environment.
2. China gives and takes away with resilience – Take BHP (ASX:BHP) as the former and A2 Milk (ASX:A2M) as the latter example for and against exposure to China depending on the segment.
3. Payment services profits – Investors are taking profits from payments service providers after turbulence was experienced over the last few years within the sector.
4. Bank stability – The big banks may be boring and past their peak, but investors and some brokers see opportunity in the stability offered through having a big name like Westpac (ASX:WBC) in their portfolios.
5. Cost management counts – Cost management is key to weathering the current high interest rate, slowing economic growth environment across every sector as margin pressure and even contraction is a noticeable trend this reporting season so far, and boy, have investors punished those companies that are failing to execute stringent cost management strategies. Cost management was also a key differentiating factor between hits and misses this reporting season.
6. Dividends remain appealing– Dividends are the key to winning over investors or prompting a mass exodus of shareholders. Whether it is a cut from record dividends or a slight rise in the payout to investors, we have seen share prices move drastically over the last few weeks on the back of changes to corporate dividends in the first half.
7. A mixed bag for retailers – Some retailers are weathering the slowing consumer spend storm, while others are doing it tough with high inventory levels and weak volumes of consumer spend.

Cochlear soars with strong results 

Healthcare saw a varied mix of results this reporting season, but for global leading hearing implant manufacturer, Cochlear (ASX:COH), the growth runway is going from strength to strength and so is its share price, which is sitting around a record high over $330/share this week.

So just how strong was the first half for Cochlear?

• Sales revenue increased 25% or 20% in constant currency to $1.113bn driven by strong demand for the company’s implants and sound processor upgrades.
• Cochlear experienced strong market growth across both developed and emerging markets as well as all age segments.
• Services revenue increased 35% over the half (or 29% in constant currency) driven by strong upgrade demand for the newly released Cochlear Nucleus 8 Sound Processor.
• A 35% increase in net profit was realised to $191m, and the underlying net profit margin was 17%.

Not only this, but Cochlear paid out 68% of underlying net profit in dividends through a $2/share interim dividend. If that was not impressive enough, FY24 underlying net profit guidance range was upgraded by Cochlear on 8 February to $385-$400m, signalling a 26%-31% increase on FY23. Demand for hearing devices and services seems to be growing year-on-year, which bodes well for Cochlear.

Two key names defy headwinds

For the retailers, two key names that Bell Potter holds a respective buy rating on, beat expectations for 1H24 and have kicked off the second half with strong results so far. Accent Group (ASX:AX1) beat Bell Potter expectations for gross margins, inventory, net debt, and dividends as well as the first 7 weeks of 2H24 starting on an encouraging note.

With exclusive brand partnerships with globally winning brands like Hoka, Accent Group is poised for resilience even during the times of slowed consumer spend.

For leading fashion jewellery retailer, Lovisa (ASX:LOV), the second half of FY24 has started with key achievements including strong gross margins and an interim dividend. Revenue rose 18%, gross margins came in at 80.7%, cash ended the half at $58.5m, which was a significant increase on Bell Potter’s expectations of $24m, and the fashion jewellery retailer declared a 50cps dividend.

For the first 7-weeks of the 2H24 total, sales are up almost 20% on new store growth and the current store network is sitting at 860 stores worldwide, which was significantly strengthened by the opening of the company’s first store in China during the first half.

“While retailer performance across the board is traditionally determined by consumer spend and fluctuations in market conditions, retailers like Lovisa and Accent Group, which target very niche audiences, have proven resilient against the headwinds of slowing consumer spend in the discretionary space.”

City Chic struggles despite profitability outlook

Unlike Lovisa (ASX:LOV) and Accent Group (ASX:AX1), which defied headwinds to perform very well in the first half, City Chic (ASX:CCX) was not as fortunate over the same period. For the first half, City Chic reported a widened statutory loss from continuing operations to $21m, revenue down 29.4% to $106m, and the second half has started with revenue down 31% on the PCP.

City Chic did, however, work hard to reduce inventory on hand to $39.5m over the half, down from $53.8m in 2H23, which is a metric that investors have hawkeyed this reporting season. The plus-size fashion specialist also expects to trade profitably in H2, 2024, which is a positive outlook, but investors were not willing to take the chance in holding City Chic shares today as its share price plunged 14% during the session.

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