3 star retailers to watch

Over recent years, the Australian stock market has clearly not done as well as its American counterparts. Financial and telecommunication stocks have performed well but others, including miners and retailers, have underperformed.

Retail stocks may now be worth reconsidering for two reasons. Recent reports indicate that consumer confidence in this country is rising. Accordingly, increasing discretionary spending will favour retailers. In addition, a relatively higher Australian dollar benefits importers and, as most manufacturing occurs overseas, retailers are again advantaged.

Here are three worth adding to your watch list:

1. Kathmandu Holdings (ASX: KMD) is engaged in the design, marketing and retailing of clothing and equipment for travel and adventure. Katmandu sells outdoor clothing and recreational goods imported from overseas, labelled with its own brand. It has 87 stores in Australia, 44 stores in New Zealand and five stores in United Kingdom. It also makes its merchandise available through its online store.

2. The Reject Shop (ASX: TRS) is a discount variety retailer of general merchandise products. The company has around 276 stores, increasing to 320 by end of calendar year 2014. Stores offer a variety of general consumer merchandise, with particular focus on everyday needs, as well as lifestyle and seasonal products. The Reject Shop works on a low price, low margin structure but has high volume. It does not have an online facility, as the average basket size of approximately $11 is well beneath what would suit an online purchasing and distribution system.

3. JB Hi-Fi (ASX:JBH) operates more than 182 stores across Australia and New Zealand. It is rapidly growing via an aggressive roll-out program that aims to have 214 stores by the end of this calendar year. Constant development of new hardware gadgets and products are driving organic growth. New stores will continue to increase earnings growth during the next few years. Like Katmandu, JB Hi-Fi complements its physical stores with its own online shop.

Foolish takeaway

JB Hi-Fi continues to impress with return on equity averaging 58% for each of the last four years. The Reject Shop has returned 31%. Kathmandu has had an average of 13.3% return on equity for the last four years.

All three companies are dominant in their respective markets and are steadily increasing shopping outlets. They share a common goal of attracting the discretionary dollar. Expecting an Australian dollar above 90c, I would be looking for capital growth and continued dividend appreciation in all of these highly innovative companies. JB Hi-Fi pays a slightly higher dividend at 4.0%, and all have a comparable dividend growth expectation looking towards the next two years.

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Motley Fool contributor Chris Koenig does not have shares in any of the companies mentioned.

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