Investing in retail: discretion required

The news today is all about discretionary retail, with David Jones Limited (ASX: DJS), OrotonGroup Limited (ASX: ORL) and Kathmandu Holdings Limited (ASX: KMD) all releasing first-half profit numbers this morning.

From a look at the share price reaction, these companies are friendless on our market –with Kathmandu leading the declines, down 13% an hour into trade, with DJs down 10% and OrotonGroup the best of a bad bunch, down 5%.

The share price falls were roughly in line with the profit results – with a 43% NPAT fall for Kathmandu and 19.6% for David Jones. Oroton was the standout in this company, managing to grow profit by 4%.

You know the sector is friendless when a 4% profit growth leads to a 5% fall in the share price. That said, Oroton was trading very close to a 12-month high, so perhaps expectations had run ahead of the reality. Even David Jones – for a 10% decline, has only dropped back to the levels oInvestingf mid-February.

Perhaps the answer for all three is in the outlook – each of these retailers describe a cautious consumer and an expectation that a recovery may be a while away.

One of my least favourite clichés in investing is the old sawhorse ‘it’s a stock picker’s market’. Yes, a bull market makes money for everyone, but choosing well increases your odds of outperforming the market right across the cycle.

It should always be a stock picker’s market, and the different performance of these three companies – in an environment of soft consumer spending – underscores that fact.

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Scott Phillips is a Motley Fool investment analyst. Scott owns shares in David Jones and OrotonGroup. You can follow him on Twitter @TMFGilla. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691)

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