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How this ASX sector outperformed all expectations

Let me ask you a question. What is the weakest sector in the ASX with the poorest growth prospects? 

Many investors would point to Australian retail, particularly brick and mortar businesses. It’s a crowded space with new players like Amazon joining the Australian market, consumers are growing ever so demanding and e-Commerce is the norm. While this may be the underlying case, ASX 200 retailers delivered results this earnings season that surprised the market.

The JB Hi-Fi Limited (ASX: JBH) share price spiked 10% on the day of its full year 2019 results. The company delivered a well-rounded result as total sales increased by 3.5%, net profit was up 7.1% and EPS also increased by 7.1%. This strong result is reflected in the momentum of the JB Hi-Fi share price that is up 20% since its announcement. Looking forward, it expects some “variability in the sales environment” but confident in its ability to execute and grow market share. For FY20, the company expects total group sales to be circa $7.25 billion, which represents an increase of 2.2% on FY19.

Despite the Harvey Norman Holdings Ltd (ASX: HVN) share price falling 6% on the day of its full year FY19 announcement, I believe the company delivered a pleasing result with profit after tax up 7.2% and earnings per share up 4.5%. The company’s solid result was driven by strong revenue growth in its 90 Harvey Norman company-operated retail stores overseas. Harvey Norman intends to continue to grow its international retail footprint and expects to open up to 21 new stores overseas within the next two years. 

The Baby Bunting Group Ltd (ASX: BBN) share price soared almost 20% to $2.91 before closing at $2.70. The company delivered a stunning pro forma NPAT growth of 58.2% and strong comparable store sales growth of 8.7%. It expects FY20 pro forma NPAT to be in the range of $20-$22 million, which would represent a minimum increase of 24.5% on FY19. I believe Baby Bunting has lots of room to grow in terms of its digital presence and rollout of new stores.

Foolish Takeaway

I personally can’t bring myself to invest in ASX retail shares. Business conditions are challenging and I would rather have my capital in a growth sector such as technology and healthcare.

However, these three businesses have demonstrated solid growth prospects and continue to overdeliver on expectations. JB Hi-Fi represents good long-term value if it can maintain low-mid single digit sales growth, Harvey Norman should see mid-high single digit net profit growth as it continues its international rollout of stores and Baby Bunting has lots of room to grow digitally and physically in its niche market.

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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