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Citigroup picks retail stocks that are best placed to beat profit expectations in August

The retail environment isn’t getting any better. If anything, macro conditions could become more challenging although this doesn’t mean all retail stocks will disappoint at the next profit reporting season.

On that happy note, Citigroup has looked at the small cap retailers under its coverage to pick the stocks that are best placed to deliver a pleasant earnings surprise next month.

The stocks that are best placed to beat the street (meaning to deliver profits above consensus forecast) include footwear company Accent Group Ltd (ASX: AX1), furniture retailer Nick Scali Limited (ASX: NCK), apparel and stationery group Premier Investments Limited (ASX: PMV) and auto accessories and outdoor gear chain Super Retail Group Ltd (ASX: SUL).

Industry feedback suggests that footwear sales in the January half remained strong and Accent should be well placed to capitalise on this though its new product launches (such as Nike) and strong momentum in its licensed brands Vans and Sketchers.

Citigroup also believes favourable weather trends and lower levels of discounting could help management deliver a 5% to 10% upside to consensus forecast for FY18.

Meanwhile, the broker thinks Nick Scali’s FY18 forecast of 5% to 10% net profit growth for the full year may be too conservative despite growing industry headwinds with the softening property market.

Citigroup’s optimism stems from a strong January trading performance (apart from the first week), a 12% increase in customer deposits at the end of December 2017 with a strong order book and cost management.

It is also worth pointing out that management has a tendency to under-promise and over-deliver and has an excellent track record in retailing.

Much can also be said about the quality of management for Premier Investments, in my opinion, and Citigroup points out that favourable weather, strong Mother’s Day trading, and improving womenswear fashion trends in winter will likely bolster the group’s second half performance.

“We expect 2H18e LFL [like-for-like] sales growth to accelerate 100bp on 1H18,” said the broker.

“The company does not provide guidance, but still benefiting from the ramp-up of store openings at Smiggle UK.”

Finally, Citigroup sees upside earnings risk for Super Retail thanks to resilient LFL sales and stable margins as gross margin expansion offsets increasing costs of doing business, particularly in relation to its online expansion.

The broker has a “buy” recommendation on Accent and Super Retail, but a “neutral” on Premier Investments and Nick Scali.

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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. The Motley Fool Australia owns shares of Super Retail Group 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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