Why the outlook for ASX retailers is suddenly looking brighter

The discretionary retail sector is one of the few bright spots on our market today as the latest retail sales data could be indicating that the Christmas trading season won’t be as bad as many have feared.

The sector is only one of three on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index that’s trading in the black in after lunch trade.

The Wesfarmers Ltd (ASX: WES) share price is up 1.6% at $31.75, while the Super Retail Group Ltd (ASX: SUL) share price and Harvey Norman Holdings Limited (ASX: HVN) share price have jumped over 2% each at the time of writing when the S&P/ASX 200 lost 0.6% of its value.

Sunshine in the Retail Sector

Australian retail turnover improved 0.3% in October (seasonally adjusted) according to the latest Australian Bureau of Statistics (ABS).

This is in-line with consensus forecast and that’s a big win as many had feared the data would be weaker than expected following yesterday’s dismal gross domestic product (GDP) growth figure of 0.3% for the September quarter.

That was half what economists were forecasting and the weakness was blamed on weak discretionary spending from over stretched consumers.

Furthermore, five of the six categories sale improvements with clothing, footwear and personal accessory retailing leading the rise with a 2.6% increase, noted the ABS.

Even department store sales managed to eke out a 0.4% gain and that could explain why the Myer Holdings Ltd (ASX: MYR) share price is 0.5% at 40 cents ahead of the market close.

Interestingly, it was restaurant, cafes and takeaway food outlets that were the worst performing as sales fell 0.9% in the month. This segment had been a strong performer for most of 2018.

Also notable was that all states posted increases bar for New South Wales where retail turnover dipped 0.4%.

Sydney is the capital of the housing downturn and that could explain the weakness.

Will Retailers get any Xmas Cheer?

I spoke with a retail consultant last week who told me that he expected Christmas sales to grow by around the same amount as the previous year (around 2% to 3%).

Yesterday’s GDP data made me think that was too optimistic but the latest retail figures means my contact may not be far off the mark – and that’s good news for our listed retailers.

But the cheer won’t be equally felt across the retail sector. Department stores are likely to still be under pressure while it’s the specialist retailers like Super Retail and Premier Investments Limited (ASX: PMV) that are better placed to outperform.

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