I have always been fascinated by ASX retail shares. Good retail companies have an energy to them. An energy you can feel when you visit their stores. Moreover, to be successful in retail, it takes a set of skills that are hard to find. Things like store layouts, location, inventory management, customer focus, and product selection to name a few.
I recall being very impressed by JB Hi-Fi Limited (ASX: JBH) when I first discovered the place years ago. I remember thinking it would be cool to have worked there in my late teens and early twenties. Similarly, I really enjoyed the Apple stores when they first appeared.
If I had acted on my impulses about JB Hi-Fi and invested at the start of 2010, I would have doubled my initial investment by today. That takes a compound annual growth rate (CAGR) of approximately 7.3%. Far more than what I would have received from any cash savings account, and more than real estate returns where I live.
Most retail stores were closed for several months during the early phase of the coronavirus pandemic. In addition, many of them are again closed in Victoria. Consequently, the share prices of many retail companies have dropped significantly. I think that makes this a great time to invest in the right ASX retail shares.
An ASX share for fashion
My teenage daughter absolutely loves the Platypus sneaker store. It has a great range, there is always good contemporary music, it is filled with other kids around her age, and the staff there either really enjoy their work or they are great at pretending. Platypus is one of the brands run by Accent Group Ltd (ASX: AX1). Some of its other well known brands include Vans, Skechers, Hype DC, Athlete's Foot and Dr Martens.
On 25 June, Accent Group released a business update covering the lockdown period. This is unaudited and may change, however it was surprisingly positive. The company expects to announce earnings before interest, taxes, depreciation and amortisation (EBITDA) around 10% higher than FY19. This has been helped by surging digital sales, with online sales accounting for 23% of all sales in June.
I have long been impressed with CEO Daniel Agostinelli's financial acumen. In particular, because he acts quickly on underperforming stores. The update includes the commitment to close stores where landlords were not willing to negotiate in the spirit of the government code of conduct surrounding leases.
The price of this ASX share is still 29% lower than it was at the start of the year. At the time of writing, it is trading at a price-to-earnings ratio (P/E) of 13.38 and has a respectable trailing 12 month dividend yield of 6.87%. The company has grown its share price by around 7% per annum on average over 10 years.
Jewels and high fashion
At first glance, the market for jewellery and watches appears to be very crowded. When you go into any major mall there are numerous jewellery stores, normally located next to one another. However, on closer inspection, the market is far more segmented than it appears. Companies like Lovisa Holdings Ltd (ASX: LOV) and the Danish chain Pandora compete for the fast fashion market.
However, Michael Hill International Ltd (ASX: MHJ) pitches itself as slightly more upmarket. While its stores offer items under $500, generally they sell premium jewellery to a premium clientele. Consequently, the company has fewer competitors than it appears. Mazzucchelli's sells to an even wealthier clientele while Smales Jewellers, Goldmark and Sheils carry more jewellery in the under $500 range.
I'm drawn to Michael Hill shares by three of their metrics. First, they have a four year average return on equity (ROE) of 15.1%. This means that for every $1.00 of net assets the company earns $0.15. This tells me it invests in the right assets and is able to use them effectively to generate profits. Second, at the current share price, Michael Hill is paying a trailing 12 month dividend yield of 7.97%.
Lastly, in a recent update, the company reported a Q4 FY20 increase in digital sales of 193% against the prior year. However, across FY20 total sales were down by 13.7% due to the coronavirus pandemic. As a result, this share isn't going to get a lot of love during the earnings season. However, it is setting itself up for a very profitable future via a digital first sales strategy.
Foolish takeaway
When the market moves all together there are always many profitable opportunities. In the case of these two companies, the underlying business model works and both are successfully transitioning to online sales, albeit a little later in the case of Michael Hill. In my opinion, both of these companies are undervalued, have a solid dividend payment history, and operate well in competitive markets.
I am personally very interested of both of these ASX shares and think they deserve a place on your wishlist.
