Why these retail shares are on my shopping list

The retail sector has been one of the worst performing areas of the market over the last few months amid concerns that falling house prices could be having a negative impact on consumer spending.

While there certainly is a risk of this happening, I think the selling has been severely overdone and created a few buying opportunities for investors.

Three retail shares that I would consider buying are listed below:

Adairs Ltd (ASX: ADH)

I’ve been incredibly surprised by the sudden decline in the Adairs share price. It wasn’t that long ago that the home furnishings retailer’s shares were trading at a 52-week high, now they are languishing a sizeable 35% below this level. This decline means its shares are now priced at just 9.5x earnings and offer a massive trailing fully franked 7.8% dividend. While this would ordinarily scream out “value trap” to me, its recent trading update says anything but that. Adairs has delivered solid like for like sales growth year to date and is on course to achieve EBIT growth of between 4.9% and 13.7% in FY 2019.

Baby Bunting Group Ltd (ASX: BBN)

I think that this baby products retailer could be a good option for investors. FY 2018 was an incredibly difficult year for the company due to the closure of a number of its biggest competitors which led to heightened levels of clearance activities. The good news is that the company has moved on from this now and recently reported a 17% increase in sales year to date. This was driven by a 9.6% increase in comparable store sales. And with margins widening due to its stronger buying power and lower competition, management expects EBITDA growth in the region of 34% and 45% this year.

Super Retail Group Ltd (ASX: SUL)

This retail group is another quality option in the retail space for investors to consider right now. The company’s Rebel, Super Cheap Auto, and Macpac all reported solid same store sales growth at its annual general meeting last month. If this continues to be the case through the all-important Christmas period then Super Retail could prove to be a bargain buy at just 10x trailing earnings. Especially given that its shares offer a trailing fully franked 6.5% dividend.

Motley Fool contributor James Mickleboro 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.

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