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Why this popular but beaten down ASX retailer is surging higher today

Retail stocks are finally getting their 10 minutes of sunshine! The sector is among the hardest hit on the ASX from the COVID-19 pandemic.

But optimism is starting to filter through even as more consumer discretionary companies announced mass store closures, withdraw guidance and cancel or postpone their dividends.

So, while S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) jumped 1.8% in early trade, many retail stocks are surging well ahead of the broader market.

This includes the Wesfarmers Ltd (ASX: WES) share price and the Breville Group Ltd (ASX: BRG) share price. I think the latter is looking particularly attractive.

Feeling the love

Another example of an outperformer is the Lovisa Holdings Ltd (ASX: LOV) share price. Shares in the jewellery chain jumped 8.6% to a one-week high of $4.17 at the time of writing despite issuing bad news.

“Effective from today, our stores in Australia, New Zealand and South Africa are now temporarily closed, joining France, Spain, Malaysia, the USA and UK which have all been closed over the course of the past week,” said the company in its ASX statement.

“Singapore is the only company-owned market currently continuing to trade.”

No end to uncertainty

Fingers crossed that remains the case as Singapore just recorded its highest one-day jump in coronavirus cases. There’s speculation that the government there will impose even tighter restrictions to curb the spread.

Lovisa also added that it doesn’t know when their stores will reopen even though governments in some countries where it operates have given a deadline for when restrictions will end.

This means management, or anyone else for that matter, won’t be able to quantify the financial impact to the group.

Dividend deferred

In another blow to shareholders, management said it would defer payment of its 15 cents a share interim dividend by six months to October.

At least it didn’t scrap the dividend like Super Retail Group Ltd (ASX: SUL) did today. Shares in the auto accessories and outdoor gear group plunged 3% to $3.85 on the news.

However, Lovisa shareholders aren’t out of the woods. The company reserves the right to review this decision again before the payment is made, so there is a chance that the dividend will be cancelled.

Foolish takeaway

Why then is the Lovisa share price outperforming so strongly? Well, I believe its because management managed to get its existing lender to agree to an increase the limit on its borrowing facility and to extend the maturity date by a further three years.

It’s a pity that management didn’t say what the increase is, apart from management reassuring investors about its “already strong balance sheet”.

Store shutdowns and dividend culls are part of the “new normal” and won’t shock anyone. The focus is on survival and that puts the spotlight on a cash crunch. Companies that can show they have the cash resources to stay alive over the next few months will be supported even in this bear market.

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Motley Fool contributor Brendon Lau owns shares of Breville Group Ltd. The Motley Fool Australia owns shares of and has recommended Super Retail Group Limited. The Motley Fool Australia owns shares of 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.

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