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UBS says these 5 ASX retailers are at risk of a Christmas downgrade

Investment bank UBS has warned that there are five ASX retailers in-particular which face difficult trading conditions and are more vulnerable than most.

Those five ASX retailers are: Myer Holdings Ltd (ASX: MYR), JB Hi-Fi Limited (ASX: JBH), Breville Group Ltd (ASX: BRG), Super Retail Group Ltd (ASX: SUL) and Harvey Norman Holdings Limited (ASX: HVN).

Christmas is an important time year for nearly all retailers, particularly ones that generate a lot of their profit in December and November.

However, this Christmas will be particularly interesting because of Australia’s declining house values. Rising house prices helps consumers open up their wallets, so it’s possible that falling house prices may have the reverse effect.

The September 2018 quarter showed that retail sales were slowing. With continued low auction clearance rates and falling house prices we may see retail growth slow further.

However, share prices are usually forward looking. Since reporting season highs we have seen Super Retail Group shares fall by 24%, JB Hi-Fi is down 10% and Harvey Norman is down 27%. Myer is down 30% since mid-September.

Perhaps all of the above falls already take into account a subdued festive retail season.

Falling house prices isn’t the only thing that may hurt ASX retailers. Online retail continues to grow. Amazon may only have a small slice of the total retail pie, but like Aldi, it may cause everyone to reduce prices and therefore lower margins to maintain market share. Not to mention the effect of other online-only retailers like Kogan.Com Ltd (ASX: KGN) and AppliancesOnline, for example.

Foolish takeaway

I am continually impressed by the ability of Breville and JB Hi-Fi to keep increasing revenue and profit. Will their fortunes turn negative in FY19? It’s hard to say.

The retailers are not exactly expensive right now. JB Hi-Fi is trading at under 12x FY19’s estimated earnings, Breville is trading at 21x FY19’s estimated earnings and Harvey Norman is trading at 10x FY19’s estimated earnings.

Whilst retailers do look cheap, retail is too cyclical and competitive for me to invest. Plus, those earnings only look cheap if the estimates are correct – lower earnings are quite possible, as UBS said.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.