Australian retail stocks have shrugged off poor consumer and investor confidence in the past 18 months to notch up some truly impressive gains. The standout performers have been JB Hi-Fi Limited (ASX: JBH) and Kathmandu Holdings Ltd (ASX: KMD), both climbing well over 100%.
With interest rates at record lows, consumer confidence rising, and retail sales climbing for the past three months combined, with an annual growth rate of 4.6%, it seems pre-emptive investors have played the sector nicely. Although in recent times, fashion and apparel sales have underperformed, Deutsche Bank analysts believe there are a number of positive trends appearing in the space.
It noted the resilience of consumer electronics, appliances and furniture, which is great news for companies such as Harvey Norman Holdings Limited (ASX: HVN) and Nick Scali Limited (ASX: NCK). However the broker has said investors need to be cautious of overpaying on stocks which have already got higher earnings priced in. It believes JB Hi-Fi’s price of $21 is too high and has put an $18 target on it, rating it as a hold. Likewise, Harvey Norman’s current price of $3.26 is higher than they’d like to pay at $2.90.
The only consumer discretionary stock which has a ‘buy’ rating on it is Myer Holdings Ltd (ASX: MYR). It currently trades on the most modest earnings multiples of all its rivals. The broker has put a price of $3.10 on the stock, which is 16% higher than its open this morning. In the past week, the stock has fallen 3.6%.
I was lucky enough to buy into Myer around $2.20 earlier this year and still believe it’s the one of the most fairly priced retailers on offer. However, long-term headwinds plague the sector, including international competition and the threat of online shopping. Harvey Norman, JB Hi-Fi, David Jones Limited (ASX: DJS) and Myer have each adapted well to online sales (with the exception of the Myer website cash on boxing day), although I’m not sure if it’ll be enough in the long term. The lower Australian dollar will help buffer competition, as would a lower cap on GST-exempted goods.
Investors should note that a lift in retail sector earnings can be extremely patchy and sometimes it will take a while to trickle through to shareholders’ pockets. If I were entering the market for new stocks, I wouldn’t want too much exposure to the sector in the expectation of higher earnings. Waiting until companies report in a couple of months will provide a better insight into trading conditions.
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Motley Fool contributor Owen Raszkiewicz owns shares in Myer.
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