Why investors should be wary of buying retail shares

Retail sales rose an anaemic 0.2% during the month of May, according to the latest data from The Australian Bureau of Statistics.

The data likely reflects a lack of consumer confidence during the month, despite an interest rate cut from the RBA, while it could also be attributed to the warmer weather during the month.

One example of this is the clothing, footwear and personal accessory retailing category which declined 1.2% during the month. May was unseasonably warm meaning that some consumers may have delayed purchases of winter clothing, although that may bounce back this month with winter truly hitting certain areas of the country.

However, the RBA would have been hoping for a better result, particularly after it was forced to cut interest rates in May due to very weak first quarter inflationary figures which were released late in April. The RBA also decided to leave interest rates on hold yesterday, but may reconsider its stance next month if the second-quarter inflation figures are weak as well.

Department stores continued to struggle with zero growth for the period. Shares of Myer Holdings Ltd (ASX: MYR) fell a little over 3% yesterday as a result.

Household goods retailing also dropped 1.1% which dragged shares of Harvey Norman Holdings Limited (ASX: HVN) almost 4% lower, with personal goods retail sales down 1.2% as well. A number of other retail stocks also fell, which you can see here.

On a more positive note, food retailing jumped a seasonally adjusted 0.7% and takeaway food services lifted 0.9%, which could bode well for businesses such as Domino’s Pizza Enterprises Ltd. (ASX: DMP) and Retail Food Group Limited (ASX: RFG).

In geographic terms, it was the Northern Territory (-0.6%), Western Australia (-0.7%) and Queensland (-0.4%) that did much of the damage, which could partially reflect the difficulties being faced in the mining regions. Greencross Limited (ASX: GXL) is one company that has been harmed by a downturn in discretionary sales in these regions, as has Super Retail Group Ltd (ASX: SUL).

Australian Capital Territory (-0.3%) was also a drag, with New South Wales (+0.7%) and Victoria (+0.6%) mostly strong.

Indeed, as appealing as some of the companies in the retail sector may be, it can be a risky sector to invest in. Aside from anything else, sales can falter when times do get tough and when consumer confidence falls, with some companies more vulnerable than others, which is something investors ought to keep in mind.

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Motley Fool contributor Ryan Newman owns shares of Retail Food Group Limited. The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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