Australian consumer sentiment and the ASX retail sector, in general, face a challenging backdrop. Macroeconomic stimulus such as tax rebates and interest cuts have failed to boost consumer sentiment.
In addition, the catastrophic bushfires around Australia and the threat of coronavirus have also dampened discretionary spending.
However, despite its cyclical and competitive nature, the ASX retail sector allows investors to include some of Australia's best brands and businesses in their portfolio. Although there are challenges facing the sector, such as online retail, it cannot be ignored there is still value to be found.
To prosper from ASX retail shares, investors should be looking for companies that can sustain growth through the cycles and are also leveraged by global expansion opportunities.
So, here are 2 ASX retail shares that fit the profile and could supercharge your portfolio.
Temple & Webster Group Ltd (ASX: TPW)
The Temple & Webster share price has charged more than 48% higher since the start of 2020 and surged more than 213% in the past 12 months.
Temple & Webster is Australia's largest online retailer of furniture and homewares, boasting more than 150,000 products for sale. The company is able to offer a broad product range thanks to its innovative drop-shipping model, which allows products to be sent directly to consumers from suppliers.
Earlier this month, Temple & Webster released its half-year results for FY20. The report was highlighted by a 50% increase in revenue to $74.1 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of $2.3 million. The company also declared in the half-year report that it has reached profitability, with strong top-line growth and a debt-free balance sheet.
Temple & Webster is well-positioned to take advantage of structural tailwinds in the sector. Currently, the company estimates that only 4-5% of homeware and furniture sales are executed online. Online participation is forecast to surge and drive growth with faster internet and new technologies improving the online experience for consumers. In addition, tech-savvy millennials have joined the company's core demographic.
Temple & Webster aims to drive continued sales growth by adding greater depth to its core offering and the addition of new categories. The company is also in the process of launching a new mobile app to improve the online shopping experience.
Lovisa Holdings Ltd (ASX: LOV)
The Lovisa share price is actually trading down more than 6% since the start of 2020. However, the retailer is heavily touted by analysts to outperform.
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.
Although Australia is currently the company's largest market, Lovisa is in the process of an international store rollout strategy. The company has already entered markets in the US, the UK and France, and is projected to open more international stores in FY20. The US market is earmarked to have the greatest potential in sales growth, with Lovisa currently operating 33 stored in 5 states.
Lovisa also presents a strong capability for defensive earnings by providing customers with affordable 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.
The jewellery retailer is set to report its earnings for the first half of FY20 before market open on Wednesday, 19 February.
Should you buy?
In my opinion, the February reporting season should serve as a good indicator of how both Temple & Webster and Lovisa are positioned.
The consumer and retail sector will continue to face headwinds in the future, however, I don't think it's all doom and gloom for ASX investors.
A cautionary and prudent approach would be to start a watchlist of stocks that could benefit from the changing environment and wait for positive price action before making an investment decision.
