Australia’s largest retailers are priced for growth. Woolworths (ASX: WOW) is trading for 19 times earnings, while Wesfarmers (ASX: WES), even after issuing a profit warning for its Target chain, is trading for 22 times earnings. The high quality nature of these businesses — their scale, market share and brand power — is likely also behind their premium valuations.
For opportunistic investors, it may be time to look behind these marquee retail stocks and their weighty valuations, and instead focus on smaller players with more runway for growth. Here’s a look at two promising mid-cap retailers and some detail as to why these shares could be attractive.
Idea #1: Kathmandu Holdings
We all know the ‘weekend warrior’ type — neighbors and friends who bike, camp, ski, and rock climb their way through Saturdays and Sundays while the rest of us prefer to sleep in and drink coffee. It’s this demographic who will also be seen at a Kathmandu (ASX: KMD) store. The chain operates retail stores selling outdoor equipment and apparel in Australia, New Zealand and the UK. But it’s the chain’s expansion here in Australia that looks to be its growth engine in years ahead.
In the most recent half, Kathmandu saw sales growth of 13% over the previous corresponding period and a whopping 71% increase in net profits after tax. Australian operations accounted for 62.4% of all sales while New Zealand made up the remaining 35.6% and the UK contributed just 2%. The Australian market also led the way in terms of same store sales growth and also contributed the highest gross margins.
Yet with just 81 Kathmandu stores open so far in Australia, a market rife with ‘weekend warrior’ types, the company may have a good bit of growth ahead. Shares are currently trading for around 14 times earnings or less than two times sales, and pay a fully franked dividend in the 4% range.
Idea #2: Super Retail Group
Super Retail Group (ASX: SUL) is one of the great ASX success stories of the last twelve months, with the share price rising some 60% and substantially outperforming the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO). But there may still be some growth — and price appreciation — left.
The company owns and operates a number of retail chains, including BCF Boating Camping Fishing, FCO Fishing Camping Outdoor, Rebel and Supercheap Auto. In the first half of 2013, group sales climbed 37% and net profits after tax rose 74%. This follows years of strong sales and profit growth for the company.
Looking forward, Super Retail Group has plans to open new stores across its various retail concepts, as well as refurbish some of its existing stores. The shares are currently trading for around 21 times earnings, or an EV to EBITDA basis of 11.5, or about 1.3 times sales. The shares pay a fully franked dividend in the 3% range.
The takeaway for investors
Both Kathmandu and Super Retail Group are subject to trends in consumer confidence and discretionary spending. In the event of a recession, people won’t stop buying Weetbix at Woolies, but they hold off on that purchase of a new tent or automotive accessory.
Still, both Kathmandu and Super Retail Group could grow for years to come, with Kathmandu particularly well placed to deliver for potential shareholders given its current down-to-earth valuation.
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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.