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Are any retailers worth a buy?

The retail industry is one of the biggest segments of the Australian economy. It’s very important especially because of the number of people it employs.

However, there are a few factors that could hurt the industry in the future.

The rise of internet shopping will be a boom for some businesses, allowing them to ship to the whole city or even nationwide, it isn’t limited to who enters the shop.

Amazon is expected to soon set up shop in Australia, which could really change the dynamics of the industry. I’m sure most businesses will survive but the margins or sales volumes (or both) of most retail businesses will likely fall.

However, there are a few retail shares on the ASX that could still beat the market:

Greencross Limited (ASX: GXL)

Greencross is the business behind Greencross Vets and Petbarn. Amazon does have a pet retail segment, so perhaps Petbarn should be concerned.

However, I don’t think there should be concern. The co-location strategy of putting a vet inside a Petbarn works well for both businesses. Each business can cross-sell to the other and the member points reward system motivates customers to use the Greencross group for all their pet needs.

It particularly helps that Greencross management had the foresight to create a private label brand of pet food. This should insulate any retail damage even more.

Greencross is currently trading at 14x FY17’s estimated earnings with a grossed-up dividend yield of 4.91%.

RCG Corporation Ltd (ASX: RCG)

The RCG share price has taken a beating, with its share price down by more than 50% since the start of 2017.

RCG is the company behind footwear chain The Athlete’s Foot. Management have recently provided guidance that underlying earnings before interest, tax, depreciation and amortisation is expected to increase for FY17 compared with FY16’s results, which makes the current share price all the more intriguing.

Share prices are forward-looking, meaning that the arrival of Amazon and large international competitors could cause a dent to RCG’s earnings in the long-term. However this could already be priced in, considering the steep share price decline.

This would be a high-risk choice, but it could pay off for investors willing to invest at the current price. It’s currently trading at 11x FY17’s estimated earnings with a trailing grossed-up dividend yield of 12.6%.

Retail Food Group Limited (ASX: RFG)

Retail Food Group is the franchisor of several food chains including Gloria Jean’s, Michel’s Patisserie, Crust Pizza and Cafe2U.

The business has been expanding its total number of outlets and has plans to grow substantially in the USA and China.

As long as Retail Food Group’s businesses can keep their menus current and fresh, it should be able to keep growing at a pleasing rate. Dining out is less likely to be digitally disrupted than retail shopping, but Uber Eats and Menulog (among others) want a piece of that pie.

Retail Food Group is currently trading at 12x FY16’s earnings with a grossed-up dividend yield of 8.44%.

Foolish takeaway

Out of the three above companies, Greencross is by far my favourite. It has a clear plan to grow its pet market share and could keep growing earnings per share in the high single digits for a number of years.

However, if you want to avoid retail stocks, these growth shares could be in the perfect industries for you to buy into a growing trend.

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Motley Fool contributor Tristan Harrison owns shares of Greencross Limited. The Motley Fool Australia owns shares of Greencross Limited and 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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