Diversification is an important part of constructing a good portfolio. It would be risky to have a portfolio of only financial stocks or only telecommunications stocks.
The retail sector is a large part of Australia's economy. It is a cyclical but important industry to consider for your portfolio. Although most retail businesses don't have much to like about them, there are a few that could be good options.
Here are three of the best retail stocks in my opinion:
Greencross Limited (ASX: GXL)
Greencross has its vet business, but it also generates a large portion of its revenue from Petbarn. The retail side of Greencross achieved like-for-like sales of 4% in the half-year to 31 December 2016.
The pet population is growing alongside the human population, which should result in increasing sales for Greencross.
It also plans to try to build its pet market share to around 20%, which would be a great figure to achieve. I think it can achieve it with its strategy of co-locating a Greencross vet inside Petbarn stores.
Greencross is trading at 17x FY17's estimated earnings with a grossed-up dividend yield of 3.9%.
RCG Corporation Ltd (ASX: RCG)
RCG is the foot retailer behind The Athlete's Foot stores. It is also responsible for selling CAT, Merrell, Vans, Skechers, K-Swiss and more brands in Australia.
Shoes are one of the few products we like to try before buying. This gives shoe retailers a stronger defence against online retailing compared to electronics for example.
RCG is growing its store network quickly, it's good to hold retail businesses when they are expanding their store count. With the share price down by 44% since July 2016, this could be a good time to buy at a cheap price.
RCG is trading at 14x FY17's estimated earnings with a grossed-up dividend yield of 7.99%.
Nick Scali Limited (ASX: NCK)
Nick Scali is one of the fastest growing retail businesses in the ASX300. In its half-year results to 31 December 2016 it announced revenue growth of 15.5%, earnings per share growth of 44.8% and dividend growth of 55%.
Nick Scali has plans to grow its store count from 50 to 75 which should help grow profit by a healthy rate in the years to come.
It's trading at 23x FY16's earnings with a grossed-up dividend yield of 5.92%.
Foolish takeaway
Retail is a difficult industry to succeed in, but I think these three businesses have what it takes. Out of these three, Greencross is my favourite one because of its plans to grow its market share of the growing pet industry.
If retail stocks aren't your ideal industry, then these three strongly growing stocks should be just what you're after.
