Why did Goldman Sachs just downgrade these ASX 200 retail shares?

It has been a tough day for Harvey Norman Holdings Limited (ASX: HVN) and Premier Investments Limited (ASX: PMV) shares on Thursday.

Both ASX 200 retail shares have taken a tumble after being downgraded by analysts at Goldman Sachs.

Why has Goldman downgraded these ASX 200 retail shares?

Goldman Sachs has been busy updating its Household Final Consumption Expenditure (HFCE) model to account for its latest forecasts for household savings and sub-sector inputs.

This sees the broker now forecasting “total HFCE growth of 4.9% CAGR in FY23-25e.”

However, this growth isn’t coming from discretionary goods. Far from it, the broker estimates a “discretionary goods decline of -6.4% vs other key categories’ single digit growth.”

Based on this and other factors, the broker feels that Harvey Norman and Premier Investments could be destined for a challenging period. Conversely, it suspects that JB Hi-Fi Limited (ASX: JBH) and Super Retail Group Ltd (ASX: SUL) could fare reasonably well. It explains:

Against this softening backdrop, we are seeing increasing category growth and company quality divergence and review our outlook for 4 domestic discretionary retailers PMV, SUL, JBH and HVN against sales, margins and B/S levers, with a downgrade of PMV to Sell and HVN to Neutral on expected market share losses, while we reiterate Buy on SUL on market share gains in a relatively more resilient category and reiterate Neutral on JBH on short-term resilience though longer structural risk of share loss to key online players.

The broker has a neutral rating and $3.40 price target on Harvey Norman’s shares and a sell rating and $21.00 price target on Premier Investments’ shares.

Commenting on them individually, the broker said:

Specifically for PMV, we expect 1) growth of its Apparel Brands segment (~55% of sales, ~65% of store network) to be below market trend due to mid-low end income exposure and increasing competition from similarly priced international competitors; and 2) as sales stagnates, we expect a reversion of lease expenses will erode EBIT margins more than market currently expects. Our FY23-25e EPS is 1%-18% below FactSet consensus.

It adds for Harvey Norman:

For HVN, despite market share losses and our EPS being 7%-11% below FactSet consensus in FY23-25e, the current share price implies P/E of 4.6x excluding property (assuming 6% cap rate). Valuation: Our valuation of 50/50 SOTP and DCF is unchanged across our consumer coverage, we reduce the SOTP EV/EBIT multiples across the 4 stocks on lower growth, in-line with historical peers and industry peers.