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UBS picks its favourite retail stocks to weather this challenging environment

Don’t be put off by the weaker than expected retail figures for March and the lack of near-term stimulus in yesterday’s federal budget.

There’s still value to be found among our retail stocks although it’s getting increasingly challenging to pick the winners from the sinners.

But those looking for clues on the best retailers to target in the current environment may be keen to hear what UBS has to say as it picked its best retail stock ideas even as March retail sales flat lined versus expectations of a 0.2% rise over February.

The tax offset offered up by Treasurer Scott Morrison (or ScoMo as the tabloid media affectionately calls him) does nothing to stimulate consumer spending either.

The share market has no place for pessimists and UBS has taken a glass half full view of the sector by pointing out that the March retail figures are actually up by a very decent 3.1% when compared to the same time last year and is the second consecutive year-on-year read that is above 3%.

“Food & Liquor (+4.2% y/y) was the key standout; accelerating from +2.7% in Feb vs. our +3.0% FY18 forecast,” said the broker. “Furthermore, April foot traffic suggests momentum has improved post March.”

The above average growth for food and liquor and easing deflationary pressure have painted a positive backdrop for Woolworths Group Ltd (ASX: WOW) – the only supermarket stock that UBS rates a “buy” – and Treasury Wine Estates Ltd (ASX: TWE), which is also rated a “buy” by the broker.

“While consumer conditions are tough, we believe trends have steadied, with all categories recording growth in March and overall discretionary sales (while softening) still above trend,” added UBS.

Other consumer facing stocks that the broker thinks will outperform include online retailer Kogan.com Ltd (ASX: KGN), auto and outdoor retail chain Super Retail Group Ltd (ASX: SUL) and fresh produce company Costa Group Holdings Ltd (ASX: CGC).

I would also add clothing and stationery group Premier Investments Limited (ASX: PMV) into the mix given management’s track record and the fact that the apparel segment posted a surprising jump of 5.2% in March this year over the same month in 2017.

This is despite the warmer than usual start to autumn, which often means lower sales for these retailers.

But it’s hard to get too excited about retail in the short-term. The $140 billion tax reforms proposed by the Turnbull government is likely to give the sector a significant boost, but that won’t happen until around FY20.

In the meantime, the experts at the Motley Fool think you should be focusing on another sector that they believe will make a big impact on the All Ordinaries (Index:^AORD) (ASX:XAO) index in 2018 and beyond.

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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 COSTA GRP FPO and Premier Investments Limited. The Motley Fool Australia owns shares of Super Retail Group Limited. The Motley Fool Australia has recommended Kogan.com ltd and Treasury Wine Estates 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 Scott Phillips.

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