Will sluggish retail sales continue?

Recently released Australian Bureau of Statistics (ABS) data showed August retail sales grew 0.2% after plunging 0.8% in July. The ABS data reinforced the thinking behind the 0.25% interest rate cut by the Reserve Bank of Australia (RBA) earlier in the week.

One aim of the rate cut is to boosting consumer confidence to help increase household retail spending. History shows that buying undervalued cyclical stocks that are set to benefit from rate cuts can lead to outperformance.

Before turning our attention to potential winners though, there are two points to consider. First, if the RBA continues to cut rates over the next few months it will have a much greater effect than if this turns out to be a one-time adjustment. Second, if the big four banks, most likely led by ANZ Bank (ASX: ANZ), don’t pass on the full rate cut, then this too will dampen any effect.

The ABS divides the retailing sector into five segments. Some of these segments grew in August, such as Food Retailing and Takeaway Food Service, which is a good sign for the likes of supermarket Woolworths (ASX: WOW) and franchise owner Domino’s Pizza (ASX: DMP).

Household Goods retailing also had positive numbers, particularly hardware. Given its market position, this was likely a positive for Bunnings, part of conglomerate Wesfarmers (ASX: WES).

The sector that appeared to be under the most strain in August was Department Stores. Having endured tough conditions for some time in the department store space it is perhaps no surprise that David Jones (ASX: DJS) recently reminded the market of the value of its property portfolio.

The Foolish bottom line

Interest rate cuts can create a beneficial tailwind to companies that will boost their performance. However, investors are often better served by buying businesses that can perform well in all weather conditions because without doubt, at some point, a headwind will return.

Those kinds of companies are hard to find, but we happen to have one in mind. If you only invest in one company this year, make it our “Top Stock for 2012-13.” Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool contributor Tim McArthur doesn’t own any of the stocks mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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