Woolworths/WOW

Noting the WOW results.

We’ve thought WOW overvalued for a while, and so we don’t pay it much mind, preferring COL and MTS for an otherwise quite similar exposure.

Anyway, WOW did sell off quite aggressively on the back of its result, and the trading update was particularly downbeat, so that is of interest to us.

The WOW update is another good example of how the consumer slowdown is visible everywhere but in the consumer companies like JBH, NCK, ARB and APE. This Big W result also makes WES look amazing.

What we mean is that the slowing consumer shows up in the basket of stocks that are not your first port of call, when thinking through who is at risk from higher mortgage rates, or higher cost of living pressures.

It has felt like, to us, that the market, in response to the macro call of “look out, the consumer is at risk”, has meant everyone piles into couches/bullbars/kettles and out of food/staples/phones, and makes money doing so.

Some of it seems to be going right, in that Supercheap auto was weak today, Corporate Travel was weak yesterday (although not entirely a good read through) and APE, despite talking a good story in the headlines we’ve seen today, has not traded well, and thus might be weaker than first thought. And Seek, the online ad portal company did indeed downgrade, although the market piled back into that one, for the most part.

These are businesses trading in excess of 30x forward earnings, in some cases (the bullbar company) and very richly in the case of the kettle company, and the online employment classifieds company.

It is a little hard to fathom.

Even the mighty JBH is on a market like multiple, for a stock that surely has some cyclical risk associated with the consumer.

Now, if I put on my trained economist hat, and ask myself, what does it mean when a company is tabling weaker than expected earnings, by citing cost of living / inflationary pressures on the end consumer?

And it means only one thing. That those companies don’t have the pricing power or brand that we thought. They’ve been unable to pass those costs on, without seeing a reaction, a substitution in dollars spent.

That’s the slightly repugnant conclusion. That whatever JBH sells you means more to you (where you in this case just means the typical JBH customer, not you the reader) regardless of the prevailing price. The perceived value is higher, so they stick with it [whatever it is, a new headphone, a blender], even if there is share of wallet impact elsewhere.

Anyway, it is food for thought. We missed the boat on all those consumer names, and aren’t about to chase them now. Plus, we can see some of that top down macro call coming through, however oddly shaped it may be.

So we’ll stick with the call.

But long staples underweight consumer has been about as on the money as underweight iron ore long (insert anything you like here).

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