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Are these the best retailers to own as consumers shop more?

In the past five or six months, retailers passed through the holiday season in relatively good shape and the recent reporting season confirmed retail trade is gaining traction.

Improvements in market conditions usually don’t feel quick, but the trends become evident over time. This gives investors time to look over the companies that are developing good sales and consider taking up positions before opportunities are missed.

Kathmandu Holdings Ltd (ASX: KMD), the outdoor equipment and apparel specialty retailer, has a good track record for growing earnings. In the past three years it has almost doubled underlying net profit.

In the first half of FY2014, NPAT was up about 10%. It hit an all-time high of $3.71 this week. As consumer spending begins to rise, stores like this should see more sales.

Customers who previously were staying close to home, saving money and paying down the mortgage are becoming more active. Personal items usually see good sales growth at this point in the retail cycle. Kathmandu’s product range for trekking and outdoor life caters to people’s desire for adventure and fun.

New monthly figures from the Australian Bureau of Statistics are showing the overall trend in monthly retail trade has continued to rise for the last six months. One retailing group that performed well in February was household goods.

In seasonally adjusted terms, estimates for hardware, building and garden supplies were up 3.3% and electrical and electronic goods gained 1.5% for the month. People are becoming active in home projects and repairs. Likewise, they are starting to feel they can afford bigger ticket items like electronics, which they have been putting off.

That is good news for JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN), two of the largest publicly listed retailers of such goods. Their revenue and profit results were both up in the reporting season.

Their share prices have been subdued recently. Harvey Norman has been hovering around $3.20 a share for a number of months. JB Hi-Fi has slipped down to about $19 a share after rising to around $22 in January.

Foolish takeaway

While the market is trying to decide what to make of the near-term prospects of these retailers, long-term investors can look at the past track record of each and make some conservative estimates of earnings growth.

You have to think about where it will be, not where it is now. Predictions usually are of no help, so stick to quality companies that can maintain their median growth.

Lower interest rates will keep retailing conditions buoyant. I believe these retailers will reap higher sales from an improving economy.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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