There might finally be some good news for traditional retailers as they may have overcome the worst of the digital disruption.
This disruption is personified by Amazon as the US online shopping titan landed on our shores two years ago.
While some brick and mortar retailers have found ways to grow, many in the sector are hurting. It isn’t only the online revolution that’s causing pain. Retailers are also grappling with weak wages growth, jittery consumers, the bushfires and the potential outbreak of a new SARS-like virus!
Click or collapse
It’s little surprise that a number of high profit retailers have collapsed in recent times, like Bardot and Jeans West, while others like Super Retail Group Ltd (ASX: SUL) have issued profit warnings.
If there’s a silver lining, it’s that the structural challenge (that being online competition) is becoming less of a drag on profits. That’s the assessment by UBS and reported in the Australian Financial Review.
“Online retail sales in Australia have grown at a 14% CAGR for the past 3yrs, and now make up ~9% of retail sales,” said UBS.
“The rate of online penetration growth has, however, slowed since peaking in Feb-19.”
Slowing online sales
The findings are backed by the broker’s latest survey of 1,016 consumers in Australia. UBS concluded that while online penetration will continue to grow, the growth will slow to around 12% by FY24.
It also believes that local retailers are well placed to recapture market share from online rivals and use their physical store networks as a differentiator.
Those with a store front will give consumers a chance to try the products before purchase and to allow in-store pick-up as delivery fees and time are big bugbears.
Are retail stocks looking expensive?
But the good news may already be in the share prices of several retail stocks. The broker noted that the price-earnings ratios for several have re-rated around 50% while earnings per share forecasts have been cut by 2% over the past year.
Stocks looking like bargains
“We believe this, in part, reflects easing concerns around online (margin, share) with multiples broadly fair relative to growth profiles,” said UBS.
“We continue to favour retailers with attractive valuations, offshore growth angle, improving ROIC [return on invested capital] and scope for store/share growth.”
Based on those measures, the broker is urging investors to buy Treasury Wine Estates Ltd (ASX: TWE), Flight Centre Travel Group Ltd (ASX: FLT), Myer Holdings Ltd (ASX: MYR), A2 Milk Company Ltd (ASX: A2M) and Premier Investments Limited (ASX: PMV).
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited, Premier Investments Limited, and Treasury Wine Estates Limited. The Motley Fool Australia owns shares of A2 Milk, Super Retail Group Limited, and Wesfarmers 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.