There are plenty of analysts who are being cautious on ASX retail shares at the moment.
Retail has always been a tough sector. There are lots of competitors from Reject Shop Ltd (ASX: TRS), to giants like Wesfarmers Ltd (ASX: WES).
There are plenty of people, myself included, who have thought that retail shares could come under pressure due to a combination of factors. High debt, low wage growth, low inflation, growing online competition (Amazon) and tighter margins (due to businesses like Afterpay Touch Group Ltd (ASX: APT) taking a clip of the ticket) are hurting potential retail growth.
But it's a bit of a mixed story. Shorting JB Hi Fi Limited (ASX: JBH) would have been a terrible decision this year with its share price up 73% in 2019 so far.
Yet there are some retail shares that are suffering. The Nick Scali Limited (ASX: NCK) share price has fallen over 15% in the last month after management warned that monthly store traffic was down 10% to 15% year to date, with same store sales down around 8% compared to last year, resulting in a sizeable profit reduction expected in the December 2019 result.
So which is it? Is the retail world suffering, or is growth still there?
I think it depends on the company. New housing builds and property purchases are two of the biggest events that cause people to buy a new couch, dinner table or bed. So it's no surprise that a business like Nick Scali is seeing a slowdown because of the limited property turnover.
But an electronics business like JB Hi-Fi is displaying continuing growth because we continue to buy new phones and laptops, which is unrelated to house sales.
So, although both Nick Scali and JB Hi-Fi seem like they could be affected in similar ways, their earnings can perform quite differently in a slowdown.
Is Nick Scali or other retailers a buy?
I'm not sure it is. I've seen plenty of examples that one earnings downgrade can lead to a second or third, so it would be a bit of a gamble to decide this is the low point – perhaps the recovering housing market in Sydney and Melbourne will turn things around.
