Why the beaten-down retail sector could deliver an earnings surprise in February

It sounds like a bold statement but the retail sector could be the dark horse of the February reporting season as things may not be so bad for our retailers following the Christmas shopping rush.

Deutsche Bank notes that most operators have reported little impact from the arrival of online shopping giant and that post Christmas sales had taken off.

This bodes well for listed retailers at next month’s reporting season as investors have been bracing for earnings misses and soft (if any) growth as rising competitive pressure and profit warnings from the likes of department store Myer Holdings Ltd (ASX: MYR) had set a negative tone for the sector.

But the Christmas trading period actually turned out to be better than what many had feared with Deutsche Bank noting that sales from Boxing Day to the New Year had exceeded retailers’ expectations.

The broker believes that the impact of Amazon on the local market will take much longer to be felt and that suppliers looking to sell through Amazon’s website were left high and dry as the US titan was unable to list their products in time.

The top two categories were consumer electronics and small appliances. This bodes well for the likes of JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN).

The broker also noted that apparel sales were solid, and coincidentally, women’s clothing chain Noni B Limited (ASX: NBL) issued a profit upgrade this morning, and I am expecting a pleasing result from Premier Investments Limited (ASX: PMV) next month.

One has to wonder if embattled apparel retailer Specialty Fashion Group Ltd. (ASX: SFH) could also catch a rare lucky break!

It will also be interesting to see Myer’s results next month. If you think about it, Myer is well exposed to the three categories listed above, although I am not expecting any near-term pleasant surprises from management.

Among the supermarkets, Woolworths Group Ltd (ASX: WOW) continues to win market share from rival Wesfarmers Ltd’s (ASX: WES) Coles supermarkets over the festive season, and that should be borne out in the February earnings results from both companies.

Many are expecting this year to be a tough one for Australia retailers but consumers are a fickle bunch and this means there is a chance the sector could enjoy a positive re-rating in the weeks ahead.

There is another sector that may be better placed to outperform this year. The experts at the Motley Fool have prepared a report on this sector and highlighted the stocks that you should be watching in 2018.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited and Wesfarmers 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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