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Will the ASX retail sector outperform in 2020?

The retail sector could be one to watch in 2020 as easier credit looks to boost Australian consumer confidence and spending. In addition, strong results for FY19 earlier this reporting season has boosted confidence in the sector to outperform in 2020.

Although not all retailers may benefit from favourable trading conditions, there are certain characteristics that separate the cream from the rest. The retailers with the most potential have a strong management team, growing online sales and an expanding overseas presence.

Here are 3 retailers I think you should watch for 2020.

Kathmandu Holdings Limited (ASX: KMD)

Kathmandu is a dual-listed company and one of the largest retailers of outdoor equipment and clothing in Australia and New Zealand. Despite the retail sector facing multiple headwinds, the Kathmandu share price is trading near 52-week- highs.

Kathmandu performed strongly in FY19, with online sales growing 9.2% in 12 months and overall sales increasing 9.7% from the year prior to NZ$545.6 million. In addition, EBIT for FY19 was 12.7% higher from FY18 at NZ$84.3 million and net profit after tax grew 13.6% to NZ$57.6 million.

The company recently completed a $350 million acquisition of iconic Australian surf-wear brand Rip Curl. The acquisition of Rip Curl is estimated to reduce seasonality in Kathmandu’s earnings and contribute at least 10% to earnings per share for FY20. 

Temple & Webster Group Ltd (ASX: TPW)

The Temple and Webster share price has soared more than 90% in 2019 and is currently trading at 52-week highs. The company is a leading online retailer of furniture and homeware, boasting the largest range of products in Australia.

Temple and Webster currently have a 5% share of the Australian market and 15% market share in the USA and UK. The company recently experienced a 40% increase in revenue growth and looks to build on its core offering and continue expanding its logistics and mobile shopping capabilities. As a result, Temple and Webster is expected to beat expectations in the near term.

BWX Ltd (ASX: BWX)

BWX is the owner of Australia’s number one selling skincare brand Sukin. The company’s share price is currently trading near 52-week-highs and has surged more than 180% higher in 2019. The company’s new CEO has looked to turn the company’s fortunes around by reducing inventories and product range.

BWX has also evolved its strategy by focusing on increasing exposure to foreign markets, in particular the US. The company’s premium Anadlou range is the leading facial skincare brand in the US and BWX’s Mineral Fusion boasts a 43% share of the natural cosmetic market in the US.

The new strategy was reflected in the company’s improved performance for the second half of FY19. The BWX register had a 14% short interest in late 2018, however these positions have reduced to 8%, reflecting changing sentiment around the company’s future growth prospects.

Should you buy?

The looming presence of Amazon is a constant pressure on traditional retailers, making the sector relatively risky. In order to manage this risk, investors should look for certain characteristics in a retailer before making an investment decision.

These characteristics include making sure that management has identified weaknesses their company faces and that there are plans in place to address these weaknesses. In addition, growing online sales and the ability to generate sales overseas are also characteristics investors should look for.

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BWX 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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