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Is it time to go bargain hunting in the retail sector?

The S&P/ASX 200 Consumer Discretionary Index (ASX: CDJ) took another hit on Wednesday after index participant Retail Food Group Limited (ASX: RFG) announced an unexpected profit downgrade for its 2017 financial year which saw its share price slump over 10% for the day.

Retail Food Group’s trading update follows a raft of retailers like Adairs Ltd (ASX: ADH), Automotive Holdings Group Ltd (ASX: AHG), RCG Corporation Ltd (ASX: RCG) and Myer Holdings Ltd (ASX: MYR) who have announced profit downgrades in recent times, making investors nervous about the entire industry’s prospects.

Accordingly, with weak sentiment towards sector driving most retail stocks lower, I thought it was worth revisiting the sector to see if there were any bargain buys today. This is what I found.

Automotive Holdings Group

AHG is one of the retail stocks which issued a profit downgrade in recent times, after management cited a slowdown in consumer sentiment as the cause of weaker than expected sales.

Nevertheless, although AHG’s share price has increased over 5% since I wrote about it here, I still believe its trailing price-earnings of about 12.3x represents solid value for the underlying business.

Myer

Myer’s share price has been battered over 35% this year as Australia’s oldest department store battles it out in a competitive retail environment and braces for the impending arrival of Amazon to Australia. Whilst the risks posed by Amazon are very real for Myer, I believe the current share price of 86 cents (based on Wednesday’s close) values the company as though it’s already lost the battle against the online behemoth.

Although Myer’s earnings will be affected by Amazon’s arrival, I’m willing to take a punt that Myer won’t go down without a fight.  Accordingly, if Myer can maintain sales (or even better, grow earnings), I believe it is priced as a bargain today.

Premier Investments Limited (ASX: PMV)

Despite the entire retail sector struggling, Solomon Lew’s Premier Investments is yet to issue a profit downgrade for the 2017 financial year as its international expansion in the Smiggle and Peter Alexander brands drive group earnings higher. Even so, Premier Investments’ share price has tumbled over 12% this year, as its shares are caught in the indiscriminate sell-off that’s affected all retail stocks.

Whilst Premier Investments’ business is not immune to weak consumer sentiment or the threat of Amazon, I believe its success to-date is a by-product of the right product mix (at the right time) and a highly proactive and experienced management team.

In my mind, this combination makes for a killer one-two punch to fight earnings attrition and should see the share price recover over the medium-term, if and when investor optimism returns towards the sector.

Foolish takeaway

Although each of AHG, Myer and Premier Investments are captive to macroeconomic forces like low wage growth, weak consumer sentiment and low inflation, I believe all three are well-poised to weather the current storm that’s clouding all retail stocks injudiciously. Whilst Amazon remains a real risk for the entire retail sector, I believe all the downside from the American giant’s arrival has been priced-in to most Australia retail stocks.

This makes each of them worth a closer look in my books.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia owns shares of Retail Food Group Limited. 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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