E-Commerce Headwinds Will Dismantle Overpriced Retail Projections

Key Takeaways

• Strong earnings and margin growth assumptions may overlook vulnerabilities from shifting consumer behavior, project delays, and luxury retail softness.
  
• Optimism around urban growth and omnichannel retail might understate risks from e-commerce, remote work, and changes in foot traffic patterns.
  
• Premium asset focus, redevelopment projects, and robust retailer demand drive resilient income growth, reduced vacancy risk, diversified revenue, and strong financial positioning for future expansion.

Catalysts

Vicinity Centres (Vicinity or the Group) is one of Australia leading retail property groups with a fully integrated asset management platform, and $24 billion in retail assets under management across 52 shopping centres, making it the second largest listed manager of Australian retail property.

• Recent momentum in retail sales, record-high occupancy rates (~99.5%), and tight supply of quality retail space appear to have set expectations for continued strong rental growth and upward pressure on occupancy cost ratios; if these trends normalize or underperform due to broader shifts in retail habits or the macro environment, revenue growth could fall short of current market assumptions.
  
• The transformation of Vicinity's portfolio toward premium, experience-led, and strategically located assets, coupled with a highly publicized pipeline of major redevelopments and mixed-use projects, has likely caused investors to price in sustained elevated earnings and margin expansion, potentially overlooking the risk of cyclical consumer pullback or delayed project ramp-up that would pressure net margins.
  
• Investor sentiment may be overly optimistic regarding ongoing urban population growth, tailwinds from government incentives, and a rebounding consumption trend, discounting the impact of shifts toward remote/hybrid work or urban decentralization, which could structurally lower weekday footfall and soften long-term revenue and earnings potential.
  
• Current valuations may reflect best-case assumptions about Vicinity's ability to extract value from omnichannel retail trends (click-and-collect, last-mile delivery, etc.), while underappreciating the risks from accelerating e-commerce adoption, which could dampen physical foot traffic, reduce tenant sales, and ultimately weaken rental income and occupancy rates.
  
• Expectations for outsized growth in specialty luxury retail and experience-driven tenancy mixes may be embedding a degree of sales and profit optimism that is vulnerable to reversal given recent global softness in luxury retail, introducing heightened risk to earnings resilience and net margin forecasts if discretionary spending falters.

Vicinity Centres Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vicinity Centres's revenue will decrease by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 75.5% today to 69.0% in 3 years time.
• Analysts expect earnings to reach A$768.9 million (and earnings per share of A$0.17) by about August 2028, down from A$1.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$677.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2028 earnings, up from 11.9x today. This future PE is greater than the current PE for the AU Retail REITs industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Vicinity Centres Future Earnings Per Share Growth

Risks

• Tightening supply of quality retail floor space and strong retailer demand, combined with Australia's ongoing urbanisation and population growth, are driving high occupancy rates (99.5%) and positive leasing spreads, suggesting sustained or growing rental revenue and reduced risk of vacancy-driven revenue declines.
  
• Strategic repositioning toward premium, fortress-style assets and ongoing divestment of non-core assets have resulted in a higher-quality, higher-growth portfolio, which continues to underpin consistently strong income growth and asset revaluations, contributing positively to net profit and asset valuations.
  
• Execution of major mixed-use and experiential redevelopments (e.g., Chadstone, Chatswood Chase, Galleria) not only increases foot traffic and specialty sales productivity but also unlocks diversified long-term revenue streams, supporting both revenue and margin growth as experience-led retail trends emerge.
  
• Robust balance sheet, low gearing (26.6%), sector-leading credit ratings, and substantial undrawn liquidity position Vicinity Centres strongly to self-fund and pursue further growth opportunities, reducing financial risk and supporting future earnings stability.
  
• Consistently strong sales momentum (specialty sales at record highs across all segments, luxury sales rebounding, and positive trends into July 2025) and long tenancy durations signal resilient retailer performance and potential for continued rental escalations, directly boosting funds from operation and distribution capacity.

Valuation

• The analysts have a consensus price target of A$2.464 for Vicinity Centres based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.85, and the most bearish reporting a price target of just A$2.04.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.1 billion, earnings will come to A$768.9 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$2.61, the analyst price target of A$2.46 is 5.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.