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Is it time to sell retail stocks?

With the share prices of consumer discretionary retailers including Super Retail Group Ltd (ASX: SUL), Reject Shop Ltd (ASX: TRS) and Myer Holdings Ltd (ASX: MYR) bouncing along near their lows investors might consider if the sector is due for another leg down?

Earlier this month Super Retail released an update to the market on its trading performance which appeared to fail to inspire confidence amongst investors. It was a similar story at Reject Shop where investors were disappointed in management’s full year guidance for an essentially flat year-on-year profit forecast.

There are at least three reasons investors should be nervous about the outlook for retailers:

1)      Consumer confidence data supplied by ANZ-Roy Morgan showed a sharp drop in confidence. According to The Australian Financial Review the data showed confidence fell in May at its fastest rate in 6 years, “with most people believing they will be worse off than they were a year ago.”

 

2)      Rising taxes and Federal Budget cuts will reduce disposable incomes and force householders to reign in their spending. Reduced spending will result from (amongst other things) higher petrol prices, higher medical bills and lower welfare payments.

 

3)      Job losses such as those announced this week by Bradken Limited (ASX: BKN) and a weak outlook for job seekers is bound to both directly and indirectly lead to workers increasing their savings rather than their spending.

 

The Reserve Bank of Australia also highlighted the issues facing the retail sector in its recently published minutes, stating that “retail sales growth appears to have moderated somewhat more recently.”

Investors will need to pick and choose their exposure in this sector carefully. Some beaten-down share prices may already reflect the tough outlook for the sector, however other stocks such as JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) may have a limited margin of safety built into their share prices, and could tumble if they report weaker-than-expected results.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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