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Harris Scarfe enters administration, is the ASX retail sector in recession?

It seems yet another Australian retailer has entered administration, does this mean that the ASX retail sector is in recession?

Harris Scarfe wasn’t actually a listed retailer, but it has joined the list of many other retailers that have hit hard times like Criniti’s, Ed Harry, Skins, Napoleon Perdis, Shoes of Prey, Karen Millen, Benny Burger, Zanui and Muscle Coach.

It’s not as though ASX listed retailers live in a different universe to non-listed retailers, although some of the best retail businesses are on the ASX like Wesfarmers Ltd (ASX: WES), Woolworths Group Ltd (ASX: WOW), Kogan.Com Ltd (ASX: KGN), JB Hi-Fi Limited (ASX: JBH)  and City Chic Collective Ltd (ASX: CCX).

According to reporting by the Australian Financial Review, Harris Scarfe has gone into administration less than a month after being bought by private equity firm Allegro Funds (which also bought Best & Less and Postie Plus from Greenlit Brands).

Apparently, shortly after the acquisition Allegro realised Harris Scarfe could not continue as a stand-alone business without major restructuring, which will probably include closing loss-making stores. It has 66 stores with $380 million of annual sales and 1,800 staff.

Some retailers like Nick Scali Limited (ASX: NCK) are reporting flat same store sales growth. JB Hi-Fi is showing slowing retail growth. It’s not a great market out there. Some of the growth is going to the buy now, pay later providers in the form of merchant fees. 

Despite the RBA doing its best to get people spending by cutting interest rates, it doesn’t seem to have worked. Personally, I’m more likely to spend more if my income goes up rather than seeing record low interest rates going even lower. Wage growth is very low in Australia at the moment, as is inflation.

Foolish takeaway

Annual retail sales growth is at its lowest level for two years, with October retail sales growth flat. Black Friday and Cyber Monday sales may have given the retail sector a boost, but December could be a tough period if people have already done their Christmas shopping. Only time will tell if the Harris Scarfe administration is due to a wider decline or if it was just not a strong business model in this age of eCommerce. 

Instead of retailers I would much rather buy these top ASX shares for my portfolio next year.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. 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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