The RBA surprised most commentators last week when it decided to cut interest rates by 25 basis points. It cited poor macro conditions as a reason and promptly downgraded its medium term forecast for economic growth. Retail stocks have rallied off the back of this and with another cut anticipated later this year their strong run could continue.
Not all stocks in the sector have benefited so far. Below are two stocks that have lagged the sector – is it time to jump on these laggards?
Dick Smith Holdings Ltd (ASX: DSH)
Although competitor JB Hi-Fi Limited (ASX: JBH) has surged 6% since the cut, Dick Smith has only moved 2%. The jewel in the crown of Dick Smith is arguably its Move stores based on the 'fashtronics' concept, one that targets 18 – 30-year old affluent females who see consumer electronics as fashion accessories. The popularity of wearable fitness gadgets and selfie sticks are trends that the concept has capitalised on.
This concept provides a major point of difference in the heavily contested electronics space, partially shielding the company from the price war in retaining the key demographic of young and middle-aged consumers.
Move stores are also honing in on travel retailing by opening stores in Sydney airport. Dick Smith is eyeing overseas expansion once store numbers have risen from about seven to more than 30, including about 10 airport locations.
Now might be a good time to jump in with Goldman Sachs tipping the stock to outperform in the current reporting period, citing an attractive valuation and strong EPS growth.
Specialty Fashion Group Ltd (ASX: SFH)
In January the company forecast strong revenue growth for the first half year excluding Rivers, driven by a 5.7% increase in same store sales growth. This is a very good result in a tough operating environment and I believe it's a testament to the strong customer loyalty in its brand portfolio.
The rate cut should alleviate some of the strain felt by the company, and it will be helped internally by the continued revitalisation of the Millers brand. Furthermore, continued weakness in the price of cotton will partially offset the weaker Australian dollar, supporting the company's gross margin.
The risk however lies in Rivers. The turnaround is progressing slower than anticipated and is forecast to be a big a drag with an $11m loss in the first half. Whilst the company remains upbeat that Rivers will be a positive contribution to the group it expects this to be in the medium term. This means that until the brand starts delivering it would be wise to avoid the stock to prevent any nasty surprises.
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