The Motley Fool

Is it time to sell your retail shares?

This month there have been a number of quarterly results, conferences, and annual general meetings that have given investors a quick snapshot of how the retail sector is performing in FY 2019.

Should you be concerned or should you continue holding retail shares?

At the end of last week jewellery retailer Michael Hill International Ltd (ASX: MHJ) released a disappointing quarterly update which revealed a significant decline in sales. Michael Hill saw its global sales fall 8.8% on the prior corresponding period to $122.9 million. However, management has taken the blame for the decline, admitting that it underestimated the marketing and promotional activities required to support its strategic shift away from a reliance on discount-based pricing.

Earlier this week Reject Shop Ltd (ASX: TRS) advised that the first 15 weeks of FY 2019 had been a major disappointment. The discount retailer has seen comparable store sales fall 2.4% compared to the prior corresponding period following a severe deterioration in its sales over the last 8 weeks. Management blamed a lack of wage growth and increasing basic expenses such as fuel costs for the downturn. Which is quite surprising given how you’d expect a discount retailer to perform well when consumers are watching what they spend.

Wesfarmers Ltd (ASX: WES) also released a trading update this week for its Coles business. While the supermarket business performed very well, its petrol stations struggled. They posted a 14.8% decline in headline fuel volumes due to a substantial increase in the cost price of fuel caused by higher global oil prices. This could be a sign that rising fuel costs are starting to impact consumer spending. In addition to this, its supermarket business benefited from food inflation during the quarter, which could mean basic food items are getting more expensive.

Last week home furnishings retailer Adairs Ltd (ASX: ADH) revealed that sales have remained strong this year. It advised that it is on target to achieve its like for like sales growth targets with a 5.2% increase during the first 13 weeks of FY 2019.

Another positive report came from A2 Milk Company Ltd (ASX: A2M) earlier this week. The infant formula and dairy company reported that its sales growth had continued and it had won a greater share of both the Chinese infant formula market and the Australian fresh milk market.

What now?

Although the performances of Michael Hill and Reject Shop have been surprisingly bad, I feel these are company issues and not related to consumer confidence.

However, there is no getting away from the fact that rising petrol prices and food inflation could eat into the disposable income of consumers and lead to lower discretionary spending.

But I think it is too early to judge trading conditions on these updates and would suggest investors continue to monitor the sector during AGM season.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended The Reject Shop 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.