“[The] demand environment remains healthy against a challenging macro backdrop,” the company told shareholders last week.
That challenging macro backdrop is the highest interest rates in a generation, following 13 consecutive rate hikes by the Reserve Bank of Australia (RBA).
When the RBA started lifting rates in May 2022, the expectation among economists and investors was that higher interest payments would eventually weigh on consumer spending as they flowed through to higher home mortgage payments.
The cracks usually first appear in discretionary retail spending.
Arguably, Cettire’s customers are personally immune to higher interest rates - someone who has stupid amounts of money to spend on a pair of shorts isn’t going to have a mortgage.
But they do own businesses and investments which can be hit by an economic downturn.
So what about the other end of the discretionary retail spectrum?
Mid-range department store retailer Myer reported its first-half like-for-like sales - which take account of store openings and closings - matched last year’s record performance for the same period.
The result was better than the market had been expecting and Myer’s share price gained 16 per cent.
Rising costs and more promotional spending will dent the retailer’s profits this year, but it remains reasonably confident about sales.
Furniture retailer Nick Scali has a similar story to tell.
Revenue for the first half of its financial year was down 20 per cent from the year before, and on the face of it, that looks like a disastrous result. But last year was boosted by a lot of post-Covid supply chain catch-up.
Written orders - placed by customers but not yet fulfilled - were about the same as last year, and accelerated in the three months to December.
The Nick Scali results are significant because it sells big-ticket discretionary items such as sofas and dining room sets, which retail for several thousand dollars.
No one needs to spend A$3990 on a Parker 2.5-seat electric recliner with electric headrests and a chaise or A$2990 on a smoked oak dining table with a ceramic top.
The fact these items are still selling reveals not only questionable taste among Australia’s consumers, but also that many consumers still have spare cash in their wallets.
The retailer’s sales are proving more resilient than investors expected and Nick Scali shares rose 18 per cent after the results, suggesting investors don’t expect sales to decline in the coming months.
Shares in other discretionary retailers have also been rising. Shares in Supercheap Auto, Rebel Sport and Macpac owner Super Retail Group, and Just Jeans, Portmans and Smiggle owner Premier Investments are at, or near, 12-month highs.
Investors are looking at the latest round of retail results and deciding if this is as bad as it gets, then that’s not too bad. The strong share price performance of many retail stocks suggests investors believe consumers have mostly shrugged off higher interest rates and things will pick up from here.
There’s a few possible reasons for this.
Firstly, raising interest rates to cool demand is a blunt instrument. The only consumers it affects are those with mortgages. Those who have paid off their houses are more or less insulated. It’s true rent figures have gone up a lot, but renters usually have other options to keep their costs down, such as moving into a shared house or moving back in with mum and dad.
Secondly, not all mortgage holders are doing it tough. The rate rises are most affecting those who bought houses in the last few years, paying very high prices and using low interest rates to borrow as much as the bank would lend them.
Explaining its decision to leave the cash rate unchanged at 4.35 per cent last week, the RBA said inflation at 4.1 per cent continues to moderate but remains high, and there’s been a moderation in demand for goods.
And lest any of us get too carried away with hopes of quick interest rate cuts, the RBA warned it will be “some time yet” before inflation is as low as the bank wants it. The RBA can’t rule out a further interest rate rise.
But the share market isn’t listening.
Equities investors have clearly decided that the RBA isn’t going to raise interest rates again and the next move in interest rates will be down.
