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Will retail stocks provide a Christmas bonus?

With most retailers predicting a good Christmas shopping season, usually their busiest and best time of the year, now might be the perfect time to pick up some retail stocks.

Data released by the Australia Bureau of Statistics (ABS) today is also positive for the sector, with retail sales rising a seasonally adjusted 0.5% in October, ahead of market expectations of 0.4%. Retail turnover was also higher than a year ago, recording growth of 3.6% compared to October last year.

Over the past three months retail trade is up 0.6% compared to the three months before that where we saw a rise of just 0.1%. Consumers are gaining in confidence and opening their wallets more freely thanks to record low interest rates, rising property prices and decent gains on the sharemarket. This suggests that consumer spending is recovering having seen fairly subdued periods this year.

Department store retailers David Jones (ASX: DJS) and Myer Holdings (ASX: MYR) recently noted that they were cautiously optimistic about the upcoming Christmas shopping season. Other retailers such as Super Retail Group (ASX: SUL) and discount variety store The Reject Shop (ASX: Tis) have also recently given positive outlooks as they head into the Christmas sales period.

While very few retailers look cheap currently, earnings growth over the next few years could see revenues and profits soar. Earnings have been depressed over the past few years as retailers come to grips with heavy competition from online-only retailers, and as they ramp up their own online sites. Cost cutting, a focus on key and exclusive brands, improving customer service and providing a better in-store experience are also key strategies the retailers have adopted. These strategies may take time to implement but should serve retailers well in the years ahead.

Foolish takeaway

At current prices Myer appears to be the cheapest of the retailers, but Specialty Fashion Group (ASX: SFH) and furniture retailer Nick Scali (ASX: NCK) could also be worthy of further research.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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