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The Kogan share price surged 22% higher on Thursday, so why am I avoiding Aussie retailers?

Electronics retailer Kogan.com Limited’s (ASX: KGN) share price closed 22% higher today at $3.97 per share on the back of a bumper Christmas sales result, but I would consider this the exception rather than the rule for Aussie retailers.

Kogan.com founder & CEO Ruslan Kogan said December 2018 was “the best Christmas trading period the business has ever had”, however, the same cannot be said for most retailers around Australia with the closely-watched Westpac Consumer Confidence Index plummeting 4.7% to negative territory earlier this week as Australian’s shut-up-shop for the Christmas break.

Why I’m avoiding ASX retail shares

My view is that retail share prices could be set to tumble in 2019 as investors tighten the belt and start putting a little more away for a rainy day. The Australian media is all doom and gloom for 2019 headlined by lower bank lending, a property market in freefall and soft economic data beginning to filter through from the Reserve Bank of Australia.

These factors don’t exactly scream “buy” to me, particularly given retailers are often classified within the notoriously cyclical Consumer Discretionary sector.

Long-time Kogan rivals Harvey Norman Holdings Limited (ASX: HVN) and JB Hi-Fi Limited (ASX: JBH) both had absolute shockers in 2018, with share prices for the electronics retailers down 24.89% and 27.16%, respectively over the last 12 months. While JB Hi-Fi’s 8.96% and Harvey Norman’s 13.35% dividend yields are eye-catching, trading conditions remain challenging and I’d be steering clear.

The technical environment for retailers remains challenging as well, not just from the threat of foreign entrants such as American behemoth Amazon.com Inc. but also cheaper alternatives coming out of China. We’ve also seen major clothing retailers including the likes of Roger David and Ed Harry enter voluntary administration on the back of disappointing Christmas periods, and it would be foolish to think that these two will be the last.

So, as these retailers take stock in the new year, where should investors park their hard-earned cash in the current environment?

In my opinion, the Australian retail outlook isn’t particularly enticing, and I’m steering clear of retail stocks including Kogan no matter how cheap they may look. January usually sees more negative sales results filter through from the Christmas period for Aussie retailers with more voluntary administrations and reduced earnings forecasts on the back of lower-than-expected sales over the break.

Foolish Takeaway

I would expect that shares in Australian retailers could be in for a torrid time in the next 6-12 months as consumers tighten the belt and start to put more away for a rainy day, hitting the notoriously cyclical Consumer Discretionary sector particularly hard. I believe Fools could find value in the Consumer Staples sector based on the non-cyclical nature and solid yields offered by blue-chip stocks including Coca-Cola Amatil Ltd (ASX: CCL), Coles Group Ltd  (ASX: COL) and Woolworths Group Ltd  (ASX: WOW).

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Motley Fool contributor Lachlan Hall holds no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET. The Motley Fool Australia has recommended Coca-Cola Amatil Limited and Kogan.com ltd. 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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