We entered reporting season with markets priced for perfection, and as many predicted, as reporting season rolled on, the market gave back many of the gains it had made during the January New Year rally.
What we saw in the financial reports was a softening of cashflows and increasing pressure on profit margins as the impact of the high inflation environment started to take a toll.
While earnings during this reporting period were largely resilient – off the back of upgrades to resources and better than expected consumer spending – of the half of companies that provided forward guidance, a third were expecting an earnings decline in the coming six months.
This was reinforced by overall weaker dividends and limited buyback events, which all point to a more uncertain outlook.
In this environment, with interest rates on the rise, understanding the financial health of your investments is as important as ever. Looking into the numbers, here’s our take on the good, the bad, and the ugly from this reporting season.
Some strong Star Stock performers and surprisingly resilient retailers have taken advantage of the rising interest rate environment.
One of these strong retailers was Lovisa. The fast fashion jewellery retailer saw revenue rise ~45% in 1H23, with underlying profit after tax increasing by ~32%. It was off the back of stringent cost control and its ability to pass on price increases, reducing the impact of inflation on its bottom line. LOV has outperformed many of its retail peers, and its global store rollout is expected to sustain this earnings growth trajectory.
Source: Lincoln Indicators Stock Doctor
AUB is another well-placed stock to take advantage of the high inflationary environment. This Star Growth and Income Stock takes equity stakes in insurance brokers that service the SME market and has benefited from higher premium pricing currently flowing through the market. Annualised revenue was 51.2% higher over the previous corresponding period, with net profit after tax rising 36.6%. Management reaffirmed its earning guidance tracking in line with consensus expectations representing double-digit earnings growth, with dividends expected to increase this financial year.
Source: Lincoln Indicators Stock Doctor
As always, many companies in reporting season miss guidance or surprise on the downside. Here are two reporting season loser stocks that fail the 9 Golden Rules Framework:
This reporting season, Domino’s was one company that grabbed plenty of headlines for the wrong reasons. Coverage of Domino’s ceased in August 2022 due to slowing sales, rising cost pressures, and eroded profit margins. This reporting season has highlighted these challenges even more, with the share price plummeting 24% after reporting a soft trading update. An inability to pass on rising costs due to cost of living pressures and a subsiding of COVID tailwinds has been a double whammy for this once market darling.
Source: Lincoln Indicators Stock Doctor
Surprisingly, consumer spending remained resilient during this reporting period, but the question is, for how long? With the interest rate peak revised higher due to stubbornly high inflation, we expect to see this change over the coming six months. Temple & Webster, Australia’s leading online furniture and homewares retailer, is one retailer feeling the pinch. Like Domino’s, TPW fell sharply (down 27%) after reporting a significant drop in net profit as more people returned to rivals at major shopping centres.
Source: Lincoln Indicators Stock Doctor
There is an ever-greater risk of investing in financially unhealthy businesses in this environment. Weaker cashflows and rising debt costs are also putting pressure on financially weak businesses and seeing a rise in zombie companies.
Star Entertainment reported a $1.3 billion loss and unveiled plans for an $800m capital raising which will further dilute shareholders who have already lost over 50% in the last 12 months. This stock is trading below the depth of the COVID crisis when snap lockdowns were ordered in March 2020. SGR exhibits unacceptable levels of financial risk and is a speculative investment at best.
Source: Lincoln Indicators Stock Doctor
While fellow retailer Lovisa was a winning stock from reporting season, City Chic is at the other end of the scale. CCX specialises in plus-size women’s apparel, footwear and accessories, featuring a brick-and-mortar footprint and a global digital shop. The company reported a net loss of $27.2 million after sales slumped, leaving it with excess stock that had to be discounted. Combined with its relatively high net debt, it sees CCX rated as marginal financial health in Stock Doctor books.
Source: Lincoln Indicators Stock Doctor
At Stock Doctor, we firmly believe that you need to invest in the numbers, and ASX reporting season provides the most opportune time to deeply understand the financial health of your investments. At this point of the cycle, active investing is critical, which means diving into the detail to identify the good and, equally important, avoid the ugly.
This is not an extensive list of stocks that may have performed well or badly during the reporting season. For more information on other ASX stocks and how they performed during the reporting season, please refer to Stock Doctor.
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To discuss the future of your investments in detail, book in a free consultation with a Lincoln representative.
To discuss the future of your investments in detail, book in a free consultation with a Lincoln financial expert.
