Why JP Morgan downgraded these two popular ASX 200 retail stocks

These two S&P/ASX 200 (Index:^AXJO) (ASX:XJO) stocks have outperformed the market in recent times but their strong run may be coming to an end. Here's why…

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Consumer discretionary stocks are on the nose today as it's the only sector on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index wallowing in red ink during lunch time trade.

The Wesfarmers Ltd (ASX: WES) share price, Flight Centre Travel Group Ltd (ASX: FLT) share price and Harvey Norman Holdings Limited (ASX: HVN) are among the laggards today, but it's the JB Hi-Fi Limited (ASX: JBH) and Super Retail Group Ltd (ASX: SUL) that are coming under greater scrutiny than most.

This is because JP Morgan did a double downgrade as it cut its recommendation on JB Hi-Fi and Super Retail to "neutral" from "overweight even as it lifted its price target on both stocks.

Nothing sinister in the downgrades

Shareholders should at least be grateful that the move isn't based on anything more sinister than the outperformance of both shares compared to the ASX 200.

While JP Morgan noted that consumers are feeling a little anxious (for good reason), the consumer backdrop has improved post the federal election with the Reserve Bank of Australia (RBA) cutting the interest rate to a new low of 1.25% and the possibility of further rate cuts over the coming months.

You can also throw in the prospects of tax rebates that the federal government committed to over the next month or so.

JB Hi-Fi and Super Retail looking fully valued

"JBH reiterated its FY19 guidance at a recent investor conference yet this was expected given the importance of June with no change up/down expected," said the broker.

"Looking forward, JBH has modest store growth with LFL sales (online & offline) key, while broader category innovation outlook is less positive than in previous years. The rate of online growth (EBIT margin dilutive) and further cost savings are the main EBIT margin drivers."

Meanwhile, the auto accessories division of Super Retail is holding up better than feared while its sports retailing arm is benefitting from cost savings and operational improvements from the merger of its sports brands.

"SUL provided 3yr LFL [like-for-like] sales growth/EBIT margin/ balance sheet/capex targets in May 2018 yet has been silent on these since then, and it is unclear to us if these still stand, even with an internal CEO appointment and a largely unchanged Board," said JP Morgan.

"More detailed plans from new CEO will be of interest."

JP Morgan has a price target of $29 on JB Hi-Fi and $9.50 on Super Retail.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited and Wesfarmers Limited. The Motley Fool Australia owns shares of Super Retail 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 Scott Phillips.

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