Is NOW the time to buy these 3 retail stocks?

Retailers have taken a beating in the last two weeks – is it time to buy?

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About three weeks ago I suggested that investors should steer clear of retailers, in light of indications from the government that middle and low earners would bare the brunt of the pain in the upcoming budget. As a low income earner myself, I could see immediately that I would have to tighten my belt. I therefore suggested that retailers such as聽Specialty Fashion Group Ltd聽(ASX: SFH),聽Super聽Retail聽Group Ltd(ASX: SUL)聽and聽Premier Investments Limited(ASX: PMV) should be聽avoided because they “sell聽discretionary items to ordinary people, out of stores in malls and on main street.”

Since I made that call, two out of three of those companies are down over 5% in about three weeks, against a fall of just over 1% for the聽S&P/ASX 200 Index (Index: ^AXJO).聽So is now the time to buy?

Consumer confidence is low, and this is already hurting retailers. For example, the owner of Athlete’s Foot,聽RCG Corporation Limited聽(ASX: RCG) recently announced “worse than expected performance of the聽Company鈥檚 RCG Brands division during the months of April and May.” The company went on to explain that this was due to “the聽widely reported decline in consumer confidence which has adversely impacted retail across all聽categories in the weeks leading up to, and since, the Federal Budget announcement.”

Anybody who actually lives on $50,000 a year or less could have told you that this budget will hurt them. To quote Michelle Grattan from聽The Conversation, “Families in the bottom half of the income distribution are worse off by about $1,200 in 2014-15 while the top income families with children are worse off by about $700.”

But if you look at the impact on low income families, the picture is even uglier. According to Ben Phillips from the National Centre for Social and Economic Modelling,聽“The largest impact is for low income families, so particularly families with kids, particularly single income families. So that’s couples with kids and single parents. And their impact initially is around $2,000 per year, increasing to about $4,000 per year for 2017/18.”

This means that the families that can least afford to pay more, will pay more than the families that聽can afford to pay more. Now if you’re reading this website you’re probably not in that low income bracket. But imagine for a moment that you were… What would you cut out?

My guess is that many Australians will buy less of Super Retail Group’s sporting goods, auto accessories or outdoor gear – many will recycle, repair, or reuse old equipment instead. They will buy less of Premier Investment’s jeans and pyjamas. On top of that, the proposed takeover of聽David Jones Limited (ASX: DJS) could mean that David Jones stocks less of Premier’s products, though at least the company has plenty of cash. I don’t think Specialty Fashion will go much better (though if I had to choose one, I’d probably go for that one).

On the other hand, each of these companies yield about 4.5%, so the dividend is supporting the share price. I don’t think shareholders should sell in a panic, but I wouldn’t buy right now.聽If I was going to buy a clothes retailer, I’d go for one that is really聽cheap,聽such as聽Pacific Brands Limited (ASX: PBG) – trading on a yield of over 8%.

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

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