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2 ASX retail shares flying under the radar

Many analysts have cast doubt over the retail sector, citing waning consumer confidence and stagnant wage growth. But despite the sector-wide pessimism, there are some companies, unbeknown to many investors, that have been performing very well. Despite the challenging backdrop, these retailers have managed to thrive by offering continuous growth and also have leverage to global expansion opportunities and structural tailwinds.

Here are 2 ASX retail shares that have been flying under the radar.

Baby Bunting Group Ltd (ASX: BBN)

Baby Bunting Group is a retailer with a network of 50 stores across Australia, specialising in baby and toddler products. The company’s share price rocketed more than 50% in 2019, fuelled by strong full-year results.

Baby Bunting smashed market expectations when it reported results for FY19. The company reported a 37.4% increase in earnings before interest, tax, depreciation and amortisation, a 43.3% lift in net profit and a 21% jump in total sales. In a struggling retail environment, the company’s strong sales performance was driven by new and improved product range and better import arrangements with suppliers.

Baby Bunting has been able to dominate competitors with a 12% share of the domestic baby goods market which is worth $2.4 billion. As a result, 4 of the company’s competitors – including Babies “R” US and Baby Bounce – have gone into administration. Analysts expect the company to continue its growth and capture 30% of total sales from defunct retailers.

Lovisa Holdings Ltd (ASX: LOV)

Lovisa is a leading retailer in fashion jewellery, strategically targeting the affordable jewellery segment. The company’s business model supports high gross margins and boasts a fast supply chain that requires only 8 to 10 weeks for products to reach the store from development.

Australia is currently the company’s largest market, however Lovisa is embarking on international expansion. The company has already entered markets in the US, the UK and France. Lovisa is projected to open more international stores in FY20, especially in the US, where the company has 33 stores currently trading in 5 states.

Lovisa also presents a strong capability for defensive earnings by providing customers with affordable luxury items. The company has a great long-term growth trajectory and is expected to return to its 3–5% growth range target if retail conditions improve.

Foolish takeaway

Reporting season last year showed promising signs of revival in the sector, however only a few retailers are poised to benefit. In my opinion the retail sector will continue to face micro and macroeconomic headwinds in 2020. If investors want to get exposure to the sector, it is important that they screen for companies that have a strong online presence, earnings growth overseas and target a favourable segment.

I think a prudent strategy for investors is to keep these retailers on a watchlists and wait for positive price action before making an investment decision.

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Motley Fool contributor Nikhil Gangaram 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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