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Why investor interest in these retail stocks may be hotting up for 2019

The outlook for our listed fashion retailers may not appear particularly bright with structural changes, growth and valuation concerns dogging these stocks, but don’t write off the sector yet as the “smart money” is keen on pumping millions in capital into the industry.

Two big merger and acquisition (M&A) deals in the private sector makes me think that our listed players will still command strong support even after their share price surge.

The share price of Premier Investments Limited (ASX: PMV) is up an impressive 43% over the past year, but it’s the smaller end of the market that is a real standout with Lovisa Holdings Ltd (ASX: LOV) gaining 83% despite its recent pullback, Noni B Limited (ASX: NBL) jumping 72% and Specialty Fashion Group Ltd. (ASX: SFH) enjoying a four-fold increase in its share price.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index has increased 9% over the same period. I’ll admit, I didn’t see this coming and I’ve been underweight on the sector (I only own one stock in the group) due to concerns about the arrival of Amazon.com and other online shopping sites, as well as the difficulty Myer Holdings Ltd (ASX: MYR) was having in moving stock.

But investor interest in this space seems to be strong, if not growing after the Australian Financial Review reported the $100 million management buyout of youth fashion label Universal Store and news that Chinese investors and private equity groups are looking to buy a majority stake in activewear business, Lorna Jane.

Universal Stores has annual revenue of over $100 million and 53 stand-alone stores across Australia. Management has reportedly been able to deliver double-digit same-store sales (SSS) growth sales over the past few consecutive years, which is no mean feat compared to the SSS delivered by our listed retailers.

Meanwhile, Lorna Jane is reported to have an annual turnover of $200 million with 30% of total sales coming from online purchases this year. Lorna Jane is a popular brand in China and that explains the interest from Chinese investment group, who will be looking at expanding the retailer’s store network into China.

This shows that retailers with their own unique brands will continue to outperform and it succinctly explains why Premier Investments, Lovisa and Noni B have outperformed while Myer has struggled.

It is believed that Myer’s new chief executive will be looking to increase its exclusive brand offering as part of the turnaround strategy for the embattled department store.

That seems like an obvious strategy but I am surprised it’s taken Myer this long to work it out.

Analysts are pessimistic about Myer’s outlook but given what’s happening in the sector (and also the success of US department stores in using a similar strategy), Myer may not be as big a dog as the sceptics believe.

That’s, of course, provided Myer’s management doesn’t muck-up the execution of the strategy.

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Motley Fool contributor Brendon Lau owns shares of Premier Investments Limited. The Motley Fool Australia owns shares of and has recommended Premier Investments 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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