As interest rates rise, discretionary spending generally contracts and that’s why we’ve seen the consumer discretionary sector sell-off both locally and overseas – it makes total sense, however it’s also important to understand that there are different levels of discretion i.e. areas that consumers pull back on more than others. As an aside, it will also be very interesting to see how discretionary things are in technology as belts tighten. We’ve all witnessed the world move to monthly subscriptions for pretty much anything you want, however, will things like Netflix (NFLX US) prove to be more defensive, more ‘staple like’ as people tighten belts and opt for cheaper forms of entertainment, or will they be the first to go as we cut back on non-essential items? We tend to think the former, but this is something we don’t know – Netflix and others have simply not been around that long.
Another big consumer shift has been the explosion of active wear, sports kit, as a form of every day attire –black leggings are now a fashion statement! My wife spends ~80% of her time in active wear and while she does go to the gym, the correlation is far from perfect, nor (I suspect) is it for the majority of others that are getting around in gym tights. Lululemon Athletica (LULU US) is a Canadian company that designs and retails these products. It’s background was in Yoga but it is now very mainstream, selling $US6.25bn worth of the product in FY22 (they are a January year end) making a net profit of $1.01bn. In FY23 sales are expected to be up 23% and net profit up a similar amount, but the market is not convinced, selling the stock down from $US485 to the overnight close of US$276. Priced on a P/E of 27x growing at 20% per annum, this is the sort of ‘growth’ stock, with real earnings that MM believes investors should be focussed on into current weakness. Nike (NIKE US) is another in the consumer space we have added to our Hit List while the premium esky brand Yeti (YETI US) is another that we are assessing.
