3 retail shares on my shopping list this Christmas

Retail is a difficult industry to succeed in. With all the competitors and internet shopping, including an impending Amazon arrival, it can be hard to stand out from the crowd. RCG Corporation Ltd (ASX: RCG) is one retail business that I think will do well.

Here are three other retail businesses that have the potential to succeed.

The Reject Shop Ltd (ASX: TRS)

The Reject Shop shares have been quite the rollercoaster for shareholders over the last few years. Since August 2016 its share price has dropped by 50%, but I think there’s a good chance it could recover. The run up to Christmas is historically the best time of year for retailers, which is the next reporting period for The Reject Shop.

As the economy and wage growth slows, customers are more likely to be on a budget and consider doing some of their shopping at stores like The Reject Shop rather than Myer Holdings Ltd (ASX: MYR).

When Amazon does arrive in Australia, The Reject Shop could be one of the few retailers to continue to grow. Most of The Reject Shop’s products are low priced, so even if Amazon sells the same products it might be unattractive to a customer when a shipping fee is added, which could double the price of some products.

Just look at the continued success of $1 stores in the USA over the last few years to see what little effect internet shopping has had on these types of discount retailers.

The Reject Shop is trading at 12.7x FY16’s earnings with a grossed up dividend yield of 8.27%.

Baby Bunting Group Ltd (ASX: BBN)

Baby Bunting is Australia’s largest baby-focused retailer with 37 stores dotted around the country. Since listing in October 2015 its share price has grown by 42% and there’s a good chance it can keep growing from here.

In Baby Bunting’s latest results it revealed that net profit after tax grew by 55.8% in FY16. Management expects to open between four to eight stores in FY17 with a longer term plan to have over 80 stores.

There are a lot of products like prams, cots and toys that expectant parents like to see and feel or test before buying, rather than just buying on the internet. Baby Bunting is the largest speciality baby goods retailer in Australia, so it can provide economies of scale to customers.

Baby Bunting is currently trading at 30x FY16’s earnings.

Nick Scali Limited (ASX: NCK)

Nick Scali has been great for shareholders over the last two years because its share price has grown by over 100%. Its dividend has increased every year since FY12, growing 225% in that time.

Furniture is another thing that customers usually like to see and sit on before buying – that’s why IKEA has gigantic showrooms.
Australia’s growing wealth has translated into wealthier customers wanting to buy high-end furniture for their newly renovated homes.

Nick Scali is currently trading at 17.4x FY16’s earnings and has a grossed up dividend yield of 5.87%.

Foolish takeaway

Retail is a hard game to win, but it is possible to be successful. Out of these three retail stocks, I think Baby Bunting will have the best medium term future with its good same-sales store growth and its plans to more than double its store network.

Of course there’s a risk for most businesses, including Baby Bunting, to become a showroom for potential customers who then go online to buy at a cheaper price. It will be important to look at profit margins and same-store sales growth to make sure these numbers aren’t declining.

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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