There aren't many reasons to feel bullish about the retail sector as this reporting season has shown but there's one consumer-facing stock that's winning over sceptics.
I am referring to Breville Group Ltd (ASX: BRG) as it is fast becoming the favoured stock in the sector by brokers following its half year results last week.
The home appliances group has replaced electronics retailer JB Hi-Fi Limited (ASX: JBH) – a stock with a track record of defying the naysayers by delivering better-than-expected growth.
But brokers worry that conditions have peaked for JB Hi-Fi while Breville still has a number of growth levers to pull, such as its European expansion and the launch of a new range of coffee machines.
Ord Minnett upgraded the stock to "buy" from "hold" even though Breville's first half normalised net profit of $36.3 million was 2% below the broker's forecast.
But the broker was willing to overlook that as it was impressed with the company's strong 16% growth in constant currency terms.
While Ord Minnett believes growth will slow to 8% in the current half, it will surge ahead 14% in FY19 and 11% the year after thanks to Breville's new products and expansion into new markets.
"The most attractive feature of the growth, in our view, is that it is self-funded and global, and we believe Breville's brands are well positioned with 11% growth in FY18, even in somewhat of an 'investment' year," said Ord Minnett, which has a price target of $15.60 on the stock.
"Therefore, we are comfortable with Breville trading at a premium to the market."
Credit Suisse also upgraded the stock to "outperform" from "neutral" on the back of Breville's interim results.
The broker noted that sales growth is accelerating, its recent product launches are delivering pleasing results, its depressed earnings before interest and tax (EBIT) is due to a temporary increase in marketing and research and development costs, the additional investment is helping to build the brand internationally and there is an earnings tailwind in FY19 as Breville transitions to a direct delivery model (as opposed to using third parties) in Germany and Austria.
Perhaps Breville is trying to mimic online retail giant Amazon.com in doing direct. Amazon's arrival in Australia has triggered a shakeup in the retail sector. The troubles at Myer Holdings Ltd (ASX: MYR) is symptomatic of the structural change in the industry as the embattled department store is haunted by its "Christmas Past" in the form of Solomon Lew.
Mr Lew is the chairman of Premier Investments Limited (ASX: PMV), which is a major shareholder in Myer, and he is agitating for a board spill at Myer.
Thankfully, Breville is relatively insulated from the retail disruption as it's a manufacturer and distributor with a strong brand and successful international operations.
But it isn't all good news. Breville's first half cash flow was weak although a build-up in inventory of Nespresso products probably explains this.
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