Are these 3 contrarian retail stocks a buy?

The share price of traditional brick and mortar retailers has suffered over the last twelve months. And perhaps with good reason. The growing threat of online retailers such as Ltd (ASX: KGN) and the launch of Amazon in Australia present real threats to the traditional mall model of retail.

With declining (or expected to decline) revenues for the traditional retailers have come corresponding sell-offs in their stock. Retailers such as Myer Holdings Ltd (ASX: MYR) have seen their share price erode over a number of years. However, has the selling been overdone? Is there now some value in these three retailers?

JB Hi-Fi Limited (ASX: JBH)

JB Hi-Fi are a prominent retailer of consumer goods, including personal entertainment, hardware/electronics and large home appliances. The company also includes the Good Guys as a fully owned subsidiary.

JB Hi-Fi has increased revenues markedly for a number of years, and analysts are forecasting continued growth, albeit at lower rates than recent years. With a maintenance of its net profit margin, the strong sales growth has been reflected in increases in earnings per share. Despite the relatively recent acquisition of the Good Guys, debt levels are at a comfortable level.

Based on financials to the twelve months to July 2017 and the current market capitalisation, JB Hi-Fi is currently trading at an enterprise multiple (enterprise value divided by EBITDA) of around 18 – certainly not in ‘value’ territory. Nonetheless, based on forecasted earnings per share increases of 3% per year into perpetuity, discounted cash flow modelling shows an expected return of just over 7% at the current share price. In addition, JB Hi-Fi has a forecasted dividend yield of 4.9%.

Adairs Ltd (ASX: ADH)

Adairs is a retailer of manchester and homewares. The company has over 160 stores across Australia in five physical store formats, comprising Adairs, Adairs Homemaker, Adairs Kids, UHR and Adairs Outlets. The company also runs a membership program called “Linen Lovers” that entitles members to lower prices.

The company has increased sales revenue by 25% since 2015. Analysts are also forecasting earnings per share increases of around 15% for the next 3 years.

Using a more conservative estimate of 5% growth over the next 10 years, and 3% per year thereafter, discounted cash flow modelling shows an expected return of around 8.5% per year. Based on financials to the twelve months to July and the current market capitalisation, Adairs is trading on an enterprise multiple of 9.6.

Super Retail Group Ltd  (ASX: SUL)

Super Retail Group own and operate a number of Australian retail brands including Rebel Sport, Supercheap Auto, Ray’s, and Boating Camping and Fishing. Combined, Super Retail Group operates over 630 stores across Australia, New Zealand and China.

The company has reported only modest growth in sales revenue over the last three years. However, analysts forecast increases in earnings per share of around 6% over the next three years. Net profit margins have remained fairly stable over the last 5 years, but did show some improvement in the twelve months to June up from 5% to 7%.

Super Retail Group currently trade at an enterprise multiple of 6.3 – typically low enough to be considered of ‘value’. Based on an estimate more conservative than analyst forecast (4% growth for the next 10 years), and 3% growth into perpetuity, the current share price could be expected to provide an annual return of almost 12%.

Foolish Takeaway

Given the diversified portfolio of the Super Retail Group and lower current valuations, it may be a buy at the current price. JB Hi-Fi and Adairs still offer reasonable returns at current prices, but there is very little margin for safety with either company.

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Motley Fool contributor Stewart Vella has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Super Retail Group Limited. The Motley Fool Australia has recommended ltd. 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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