Morningstar - Q2 2023 - 20

Dispatches
Standout Consumer Cyclical Picks
Company
Inditex ITX:ES
Just Eat Takeaway TKWY:NL
Pandora PNDORA:DK
Richemont CFR:CH
Zalando ZAL:DE
Source: Morningstar Direct. Data as of March 31, 2023.
Price
EUR 30.90
EUR 17.53
DKK 655.40
CHF 145.90
EUR 37.70
Fair Value
Estimate
EUR 32.00
EUR 81.00
DKK 930.00
CHF 140.00
EUR 65.00
Price/Fair Value
Estimate
Morningstar
Rating
0.97 QQQ
0.22 QQQQQ
0.70 QQQQ
1.04 QQQ
0.58 QQQQQ
levels, and elevated savings since the
coronavirus pandemic.
Although near-term discretionary spending
is likely to weaken, we believe many structural
trends are intact, including a shift to online
purchasing in apparel and food, consolidation in
the fragmented apparel segment, and higher
barriers to entry in food delivery.
Current valuations provide opportunities
to build positions in competitively advantaged
discretionary names that are likely to weather
the crisis in good shape. Inditex ITX:ES is
our top pick in apparel, Richemont CFR:CH and
Pandora PNDORA:DK in luxury, Zalando ZAL:DE
in online apparel, and Just Eat Takeaway
TKWY:NL in food delivery.
Although the apparel sector lacks pricing power
historically, it displayed limited cyclicality in earlier
crises. Given the sector's fragmentation, we
believe that scaled players with a strong balance
sheet and cash generation, like narrow-moat
Inditex, are well positioned to continue gaining
market share, especially as weaker companies are
pushed to exit the market.
Online apparel faces numerous near-term
headwinds, but we believe that long-term structural
growth trends are intact. Generational shifts
should increase online apparel penetration, as well
as higher brand investments into channels
and the " flywheel effect, " whereby higher online
penetration leads to store closures and fewer
choices in the brick-and-mortar channel, inducing
more consumers to shop online.
20
Morningstar Q2 2023
Reduced capital availability could temporarily
limit investments into the online channel,
thereby delaying its adoption; however, we don't
expect this to be permanent, unless high interest
rates persist for more than a decade. We still
expect European online apparel to grow by the
high single digits over the next 10 years, factoring
in the current slowdown. Reduced capital
availability should diminish competition from new
entrants in online apparel. We think Zalando,
with its reach and strong balance sheet, is
best positioned to invest countercyclically and
is our top pick in this segment.
So far, luxury has been insulated from
inflationary pressure through strong pricing
power and a less economically sensitive
clientele. However, weakening asset prices and
a slowdown in gross domestic product
could dent luxury spending. We expect widemoat
Richemont to be well positioned in
a downturn with its market-leading jewelry
brands, upside for pricing, increased control over
distribution, and strong cash reserves.
We also think narrow-moat Pandora's pricing
power may be better than markets assume,
as shares remain deeply undervalued.
Falling share prices, a worsening macroeconomic
backdrop, and higher cost of funding have
shifted the focus for food delivery companies to
improving the bottom line at all costs from gaining
market share at all costs. But the structural
growth opportunity of online food ordering
is intact, and scale and improvements in delivery
efficiencies contribute to high barriers to entry
in the longer term.
Over the past 15 years, higher-than-average inflation
has helped compensate for volume declines
during periods of weak demand in the foodservice
market, with stronger European Union economies
and home delivery faring better than weaker EU
economies and the eat-in channel. The potential
for interest rates to remain higher for longer
should result in lower growth, but higher barriers
to entry. Regulations toward gig economy labor
rights are getting tighter, but there is no
consensus among national courts in Europe. We
expect higher last-mile delivery costs as a result of
stricter labor laws to increase the industry's
barriers to profitability and to benefit scaled
incumbents with already high drop densities. Just
Eat Takeaway remains our top pick in the segment.
Jelena Sokolova, CFA, is a senior equity analyst for
Morningstar EMEA.
Ioannis Pontikis, CFA, is a senior equity analyst for
Morningstar EMEA.
Carys Helm is an associate equity analyst for
Morningstar EMEA.
Pension Changes
Support Working
Longer and
Saving More
GREATER EUROPE
United Kingdom
Chancellor of the Exchequer Jeremy Hunt has
scrapped the pensions lifetime allowance, a huge
change in Britain's spring budget that aims to
bring more people over 50 back into the workforce.
There had been calls to increase the lifetime
allowance as incomes and stock markets
have risen, but abolition was a surprise. The
allowance previously kicked in when a pension
pot hit GBP 1.073 million. Exceeding that
limit could trigger hefty tax charges governed
https://www.morningstar.com/authors/2093/jelena-sokolova https://www.morningstar.com/authors/2187/ioannis-pontikis https://www.morningstar.com/stocks/xmad/itx/quote https://www.morningstar.com/stocks/xswx/cfr/quote https://www.morningstar.com/stocks/xhan/zal/quote https://www.morningstar.com/stocks/xcse/pndora/quote https://www.morningstar.com/stocks/xams/tkwy/quote https://www.morningstar.com/stocks/xams/tkwy/quote
Morningstar - Q2 2023

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