Which of Australia’s biggest retailers should you bet on?

It’s been an interesting few months for Australia’s discretionary retail stocks. Investors holding David Jones (ASX:DJS), Myer (ASX:MYR), Super Retail (ASX:SUL) and JB Hi-Fi (ASX:JBH) have watched share prices increase between 10% and 35% in recent months, only to fall by similar amounts in recent weeks. From their peaks they have seen falls of 26% (Myer), 20% (Super Retail), 18% (David Jones), and 14% (JB Hi-Fi).

Now, while every Foolish investor will know that short-term share price fluctuations are usually nothing to be concerned about — assuming the underlying business remains strong – it’s worth digging a little deeper into the health of each of these companies.

Perennial rivals David Jones and Myer have recently released starkly different third-quarter reports, which may signal a significant divergence in their short- to medium-term strategies. David Jones reported a 3.4% drop in third-quarter sales, compared with a 0.5% rise by Myer. While the disparity is concerning, much of the drop at David Jones was related to the exit of the electronics segment (the low-margin CDs, DVDs and games market consumed by JB Hi-Fi and online rivals) and the refusal to discount to unsustainable levels. David Jones has confirmed that it will focus on premium brands attracting higher gross margins and limit discounting coming into winter.

Myer has taken the opposite approach and will be extending sales heading into winter in order to clear excess inventory created by the unseasonably warm autumn. This will pit Myer against Wesfarmers (ASX:WES) groups Target and Kmart who are battling for the cautious consumer’s dollars.

Similarly, JB Hi-Fi and Super Retail’s recent updates offered some interesting insights into the future prospects of those two companies, even though they operate in slightly different markets.

Super Retail owns and operates a stable of retail brands such as Supercheap Auto, Ray’s Outdoors, BCF, AMART and Rebel Sports and saw earnings and margin growth in all three of its primary sectors: Leisure, Automotive and Sports. Of note is the scope for profit improvement through increased sales of high-margin home-brand goods and supply chain efficiency.

JB Hi-Fi forecast net profit after tax (NPAT) growth of 7-11%, however a decrease in like-for-like sales of between 1% and 3% over the first six months of the year has raised questions about the sustainability of said growth.

It appears that the future of these two Australian companies has also diverged. While scope for growth through home-brand goods and margin expansion is possible (and likely) for Super Retail, there appears to be little that can be done — barring further store openings and efficiency of scale — to boost profit for JB Hi-Fi in the medium to long term. In recent years, JB Hi-Fi has moved into what appears to be every conceivable electronic category, selling everything from digital music subscriptions to giant flatscreen TVs to car stereos. There are simply not many product categories left for JB Hi-Fi to venture into, and certainly no obvious ones which will generate the high profit margins required to return the company to its former profit-producing glory.

Foolish takeaway

There are bargains to be had in the consumer discretionary retail sector, however selection of the correct stock may mean meaningful gains in months rather than years. The turnaround story for David Jones, Myer and potentially JB Hi-Fi appears to have a long road to run, while Super Retail may continue to produce winning quarters against all odds.

Foolish investors know that it takes more than strong past performance to find a quality business and this is especially so in the retail sector at present. Shareholders of companies like Super Retail, which are able to beat the rest consistently, should be handsomely rewarded.

A little risky for you? If you’re looking for a solid investment idea, click here now to get The Motley Fool’s special FREE report, 3 Stocks For the Great Dividend Boom. The report lists the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned in this article.

Top 3 ASX Blue Chips To Buy For 2019

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked…

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of The Motley Fool’s Top 3 Blue Chip Stocks for 2019.

Each one pays a fully franked dividend. The names of these Top 3 ASX Blue Chips are included in a specially prepared FREE report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

See the 3 blue chip stocks

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.