3 reasons to steer clear of retailers

The budget isn’t doing any favours for consumer confidence…

Retailers such as  Specialty Fashion Group Ltd (ASX: SFH), Super Retail Group Ltd (ASX: SUL) and Premier Investments Limited (ASX: PMV), sell discretionary items to ordinary people, out of stores in malls and on main street. Here’s why I think they’ll do it tough in the years ahead.

1) The government has delivered what Clive Palmer describes as “an ideological budget, one that can hit people they don’t like. That’s what it’s all about, and everybody suffers.” For once, I agree with him.

Hospitals will lose funding, 16,500 public servants will lose their jobs and young graduates will not have a safety net while they look for a job. My friends who started a business (with gov’t support) after uni, would not have that opportunity under this government. Those new businesses won’t pay tax and won’t employ others, because they won’t exist. Families will lose some welfare and it will cost $7 to see a doctor. All this is sure to impact people’s desire to buy needlessly expensive clothes, in needlessly expensive bricks ‘n’ mortar stores.

2) Consumer confidence has fallen 8% in two weeks, reaching 5 year lows. That means people are more likely to defer a purchase, swap clothes with their friends, or make do with less.

3) The internet is hurting traditional retailers. The rebound in retail stocks in 2013, disguises the fact that the majority of traditional retailers are in a long term, secular decline. The vast majority of investors are over the age of 30, and believe that big retailers such as Myer Limited (ASX: MYR) and David Jones Limited (ASX: DJS) have a bright long-term future.

Maybe men and women magically develop a love for department stores as they grow older. Or maybe those business models are more attractive to people who are less comfortable using the internet, or who have formed stronger habits surrounding department stores. My department store is the internet, and even my partner suggested a department store’s main competitive advantage – amongst people our age – was that their lobby is a nice place to meet. I’m yet to find someone under 30 who regularly visits department stores. One day, this group will be the main market… but they will have formed different shopping habits.

The bottom line is that the wealthy have no reason to change their shopping habits, especially after the latest budget. Those past their earning peak won’t even be impacted by the so-called “debt levy,” the only new measure that will disproportionately impact the well off. Meanwhile, young people will be hit hard. Therefore, stores that sell mainly to young people will find it harder to sell. If I were going to buy a retailer, I’d stick with OrotonGroup Limited (ASX: ORL), because most shoppers there would be quite well-off anyway. Fortunately, though, you don’t have to buy any retailer. Personally, I prefer invest in stocks with long term tailwinds.

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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.

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