The retail sector has experienced difficult trading conditions in 2019. Sales volume growth has been in decline as consumers rein in discretionary spending. There are however, reasons for cautious optimism. As the Christmas season brings fresh shoppers to retailers’ doors, we take at a look at 3 ASX retail shares to watch.
A tough 2019
The retail industry has faced a challenging year, impacted by the housing crisis and the low Australian dollar. Consumers reined in their spending in response to lowered home values and fears of recession. Tax and interest rate cuts that took effect throughout the year have been saved rather than spent, failing to provide much in the way of retail stimulus.
The industry is also facing unprecedented disruption as online channels gain traction. According to a June 2019 report by investment company QIC, online sales will account for 15.9% of retail sales in Australia by 2028, up from 8.9% in 2018. Brick and mortar sales are expected to grow by 3.2% over the next decade, slightly up from 3.1% over the last decade.
Light at the end of the tunnel
As the housing downturn passes, overall retail sales should begin to normalise. A prolonged cycle of lower interest rates should allow consumers to pay down debt and free up income for discretionary spending. QIC estimates retail sales will grow by an average of 4.0% per year over the next decade, up from 3.0% in 2018.
According to Deloitte’s Retailers’ Christmas Survey 2019, 72% of the senior managers at Australian retailers expect positive sales growth in 2020. The majority are not projecting growth of more than 5%, but this does not mean that individual retailers will not outperform.
JB Hi Fi Limited (ASX: JBH)
JB Hi Fi has seen its share price rise more than 75% over the year, from $20.42 in January to over $37 currently. The home entertainment retailer has defied the short-sellers despite regularly appearing in the top 10 most shorted stocks on the ASX.
JB Hi Fi operates divisions in Australia and New Zealand and also operates The Good Guys chain in Australia, which it acquired in 2016 for $870 million.
The JB Hi Fi Australia division made sales of $4,726 million in FY19, up 4.1% from $4,539.7 million in FY18. The New Zealand JB Hi Fi division contributed $236 million in sales, up 2% on the previous year. Sales at The Good Guys were $2,147.9 million, an increase of 2.2% on FY18’s sales of $2,101.3 million.
The company is predicting total sales of $7.35 billion in FY20. This is anticipated to be comprised of:
- JB Hi Fi Australia $4.84 billion
- JB Hi Fi New Zealand $0.24 billion
- The Good Guys $2.18 billion
In 1Q20 total sales growth for JB Hi Fi Australia was 4.7% with comparable sales growth of 3.7%. Total sales growth for JB Hi Fi New Zealand was 3.8% with comparable sales growth of 3.8%. The Good Guys, however reported total sales growth of -0.5% with comparable sales growth of -1.8%.
Total sales were up 3.5% to $7.1 billion in FY19 from $6.9 billion in FY18. Net profits after tax (NPAT) increased 7.1% to $249.8 million and earnings per share (EPS) increased 7.1% to 217.4 cents per share. JB Hi Fi had a price-to-earnings (P/E) ratio of ~17.38 and a dividend yield of 3.80% at the time of writing.
Kogan.com Ltd (ASX: KGN)
The Kogan share price has doubled over the course of 2019, up from $3.49 in January to $7.12 currently. Kogan has grown from an online electronic retailer to encompass internet, mobile, insurance, lending, and travel offerings.
Gross sales increased 12% in FY19 to $551.8 million. Earnings before interest tax depreciation and amortisation (EBITDA) were up 15.6% to $30.1 million, and NPAT were up 21.9% to $17.2 million. Dividends of 14.3 cents per share were declared, fully franked, an increase of 10% over the previous year.
Unaudited gross sales were up 16% between July and September and 18.5% in October, with strong performances from Exclusive Brands and Kogan Marketplace. Exclusive brands is Kogan’s suite of private label brands. Kogan Marketplace is Kogan’s online marketplace, which allows brands to list products on Kogan.
Kogan had a strong balance sheet at the end of FY19 with $27.5 million in cash and an undrawn debt facility of $30 million. Kogan plans to launch Kogan Money Super, Kogan Money Credit Cards, and Kogan Energy in FY20, complementing the existing portfolio of businesses. Kogan had a P/E ratio of 39.47 and a dividend yield of 2.01% at the time of writing.
Breville Group Ltd (ASX: BRG)
Shares in Breville have hit all time highs of above $19 this year. Currently trading at $17.34, shares are up nearly 70% from $10.35 in early January. The appliance manufacturer delivered a 17.5% increase in revenue in FY19, up to $760 million, despite Brexit uncertainty and the trade war between the US and China.
Revenue growth was driven by resilient Australian growth in the face of the retail downturn, bolstered by strong US growth and European expansion. Keeping currency constant, revenue in Australia and New Zealand grew by 7% to $132.9 million, revenue in North America grew by 12.8% to $357.4 million, and revenue in Europe grew by 35.1% to $89.6 million.
New products introduced to market in 1H20 include an espresso machine that can make the fastest flat white in the world from a cold start and a blender/juicer hybrid. An all-in-one microwave, convection oven, and air-fryer, 3 new microwaves, and an indoor grill have also been launched in the first half of FY20.
NPAT was up 15.2% to $67.4 million in FY19 while dividends per share increased 12.1% to 37 cents per share. Return on equity increased to 22.7% in FY19 from 21.5% in FY18. Breville has a P/E ratio of 33.44 and a dividend yield of 2.14% at the time of writing.
We are now in the midst of the critical Christmas season. November and December are typically the most important months of the year for retailers such as JB Hi Fi, Kogan, and Breville.
Post-Christmas, continued low interest rates may lift discretionary spending and thus revenues.
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has recommended 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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