The market's dislike for retail stocks may spell an opportunity for Foolish investors.
These two companies, Kathmandu Holdings Ltd (ASX: KMD), Specialty Fashion Group Ltd (ASX: SFH) are among the cheapest on the ASX, with a bonus that they are both paying fully franked dividend yields of more than 5%.
Over the past three months both stocks have been hammered, whilst the S&P/ASX 200 (Index; ^AXJO) (ASX: XJO) has climbed 4.6%. Kathmandu has slumped 27%, whilst Specialty Fashion has dropped 12.7%.
Here's our look at what could be in store for shareholders this year.
Kathmandu, a retailer of adventure wear, hiking boots, sleeping bags, winter clothing and the like, has seen its share price hammered after warning of a slowdown in sales due to a subdued Christmas shopping season. An even bigger concern could be weak consumer confidence extending further into 2015, affecting not just the half year, but the full year results as well. At today's price of around $1.88, Kathmandu is trading on a forecast P/E ratio of 11.3x, and paying a trailing fully franked dividend of 5.6%, although the dividend may be cut this year.
Specialty Fashion, on the other hand, is trading on a prospective P/E ratio of 15.4x, with earnings expected to fall this financial year. The retailer, which counts Millers, Crossroads and Katies among its major brands, has more than 1,000 retail stores, thanks in part to the acquisition of Rivers and its 160 outlets in November 2013 for $5 million.
Analysts expect earnings to fall this financial year, thanks to heavy discounting at Rivers to clear stock, but the bad news may already be priced in. Specialty Fashion is currently paying a 5.6% fully franked dividend, but clearly, should earnings fall, the dividend is also in danger of being cut. Despite that, colleague Brendon Lau has a positive view on the company – suggesting it may be cheap.
Retailing is a cyclical business, affected by consumer sentiment and how the economy is tracking. But the worst may well be behind these two retailers, and at current prices, may be an opportunity for contrarian investors.
