Low consumer spending affects retail stocks
Investors are turning away from retail stocks after businesses are showing a decline in their financial results.
The current economic scenario indicates very poor purchasing power of consumers globally and retail stocks have less chance now to make a breakthrough. There is even risk of a stronger sell-off after the dreary first quarter financial statements for this year.
Poor consumer demand
The global economic downturn has seriously affected consumer spending in Vietnam. The reason is because of a sharp drop in the volume of exports which is leading to reduced working hours and a subsequent decline in savings. Decreased consumer spending, especially for non-essential goods, is showing in the recent financial results of retail companies. Many retail businesses in the electronics industry are struggling with a sheer drop in consumer demand in the first quarter of the year.
An analysis report of retail companies has just been published by Viet Dragon Securities Company (VDSC), showing a very bleak picture of listed retail businesses. Products in the high-end segment have not yet been much affected but durable consumer products such as phones, computers, and laptops were significantly affected in the fourth quarter of 2022. The two main retailers in this field, namely, Mobile World Investment JSC (MWG) and FPT Digital Retail JSC (FRT) have been seriously affected by the current low consumer spending.
Decline in businesses
The financial statements of the fourth quarter of 2022 which have just been announced by MWG, point out the many difficulties businesses are facing. Profits in this period fell sharply by 60.4%, to VND 619 bln, an extremely low figure in recent years. In the whole year of 2022, MWG net profit reached VND 4,102 bln, down by 16%.
However, the numbers that surprised shareholders about the businesses were the huge losses that retail chains have accumulated for the last many years, which were revealed for the first time. For instance, tax loss of Bach Hoa Xanh supermarket chain (BHX) kept increasing continuously from 2016 to 2020. Although the loss decreased to VND 966 bln in 2021, it suddenly increased to VND 2,744 bln in 2022. With the latest loss in 2022, the total tax loss in seven years since BHX was established has increased to nearly VND 7,200 bln.
Similarly, the An Khang pharmacy chain of MWG also recorded a tax loss of VND 306 bln in 2022, adding to the increasing accumulated loss from 2019 to nearly VND 320 bln. In the markets in Cambodia, MWG Bluetronics mobile retail chain has also suffered continuous losses from 2017 until now. In two years of 2021 and 2022, Bluetronics lost VND 187 bln and VND 330 bln, respectively. The decline of MWG is also reflected in the acquisition of Tran Anh Digital World JSC (TAG). After returning to MWG in January 2018, TAG has only recorded a revenue of about VND 100 bln per year, while profit mainly came from financial activities and from the revenue of thousands of billion dong from more than 30 stores.
FRT financial statements for the fourth quarter of 2022 are painted in dark colors, as the profit after tax in this period was only VND 80 bln, down VND 253 bln, and equivalent to 76% compared to the same period in 2021. According to the explanation given by this business, the reasons were due to the fourth quarter of 2021 consumer demand. Electronic products such as laptops and Apple products saw an increase in demand for work and study during the Covid-19 pandemic.
On the other hand, in the last quarter of 2022, businesses were affected by supply disruptions due to closure of factories in China. In particular, the demand for goods decreased due to unfavorable macro factors when inflation and interest rates increased and rising interest rate led to a 64% increase in FRT financial costs over the same period.
Pressure on stock price
During 2022 many retail companies made several significant and strategic changes in their operations. Some put a temporary pause on all their expansion plans to conserve their vital financial resources during current time of volatile global economy while some cut gross margins to boost sales in the current very weak consumer demand scenario. Some retail businesses even resorted to drastic measures such as laying off as many as thousands of workers in a short period of time, as in the case of MWG that laid off 7,000 employees in a three-month period.
Although MWG declared this was a mistake, instability within the industry raised concerns and put pressure on stock prices as investors were moving away and selling off stocks. When information of workers being laid off became known, stocks of MWG sold out strongly and adjusted down in six consecutive sessions, from approximately VND 48,000 to VND 42,000. When compared to the price of VND 80,000 more than a year ago, MWG has lost about 50% of its value.
Similarly, in its heydays, FRT company stocks skyrocketed to nearly VND 160,000. However, with business results continuously falling since the fourth quarter of 2022, FRT went under selling pressure from shareholders and at one point even dropped to nearly VND 70,000, equivalent to a decrease of more than 55%. Another listed retail company, Digital World Joint Stock Company (DGW), also recorded a decrease of 44.3% compared to a decrease of only 18.2% on the VN Index in the last six months. Retail stocks are all expected to face an upcoming wave of sell-off by investors when the first quarter financial statements are published with even more negative numbers compared to the previous quarter.
