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Should you stay away from retail shares?

I have often made the point that there are a few shares on the ASX in the retail industry that shouldn’t be hurt in the medium-term by Amazon. I usually point to shares like Greencross Limited (ASX: GXL), Bapcor Ltd (ASX: BAP) and Afterpay Touch Group Limited (ASX: APT) as ones that should grow in the current climate.

However, where does that leave the rest of the retail industry?

There are many shares that have done very well in recent years such as Nick Scali Limited (ASX: NCK), JB Hi-Fi Limited (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN) and Noni B Limited (ASX: NBL).

Are these shares about to go backwards because of how indebted Australian households are? They could do.

Nick Scali, JB Hi-Fi and Harvey Norman in-particular have relied on Australians upgrading their homes, furniture and appliances with the booming wealth households have felt thanks to rising house prices. However, this has come at the expense of savings.

The household savings rate is at its lowest in a decade. In the second quarter of 2017 the savings rate was 4.6% and fell to 3.2% in the third quarter of 2017. I wouldn’t be surprised if this rate fell further when the final quarter of 2017 is revealed.

Most retail stocks are cyclical to the extent that the economy bounces between growth and decline. Australia’s long-term growth has been incredible, it’s been around 25 years since the last recession. However, this record isn’t going to last forever.

Households may start to reign in their spending if they realise they are spending more than they earn. Population growth will only help business so much.

Amazon won’t dominate the retail industry for a long time, if ever. However, it may take a lot of the growth of the retail industry over the coming years. Investing in businesses that aren’t growing doesn’t seem like a good idea to me.

Foolish takeaway

I believe that many of the retail stocks on the ASX may underperform the index over the next few years, certainly over the long-term. Retail is a very competitive industry and I don’t see how many of them can ‘win’. Even if one did win the rest of the industry will lose.

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Motley Fool contributor Tristan Harrison owns shares of Bapcor and Greencross Limited. The Motley Fool Australia owns shares of and has recommended Bapcor and Greencross Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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