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How to find the rare ASX retail share winners

shopping retail

ASX retail shares… it certainly hasn’t been a good year. Retail has been something of a dirty word in the investment world for a while now. It’s no secret that the advance of e-commerce has decimated large swathes of the traditional retailing landscape, both here in Australia and around the world.

Tech shares like, Shopify and our own Ltd (ASX: KGN) have made many investors stupidly wealthy over the past decade or so. But this has come largely at the expense of existing retailers that used to dominate the physical shopfront.

Some of you might be old enough to remember the heyday of shops like David Jones and Myer Holdings Ltd (ASX: MYR). David Jones left the ASX boards a while ago when it was sold to South Africa’s Woolworths Holdings (not to be confused with the Aussie grocer). But Myer’s descent has been very public. Roughly a decade ago, Myer shares were asking around $3 each. Today, Myer is effectively a penny stock with a share price of 21 cents at the time of writing.

So should investors avoid all ASX retail shares like the plague?

Well, not so fast.

I do think retail is a risky area to invest in these days, to be sure. It’s a sector in the middle of a massive structural shift – a shift that has been dramatically accelerated by the coronavirus pandemic. But I still think there are plenty of diamonds in the rough, so to speak. And if you can find such a diamond, it might be a lucrative investment.

Finding a diamond ASX retail share

If you’re considering investing in any ASX retail share, I would recommend asking 2 questions about your potential investment. One, does it have a robust and cutting edge online store? And two, does it have something special that keeps customers coming back for more?

JB Hi-Fi Limited (ASX: JBH) is one such ASX retailer in my view. JB was written off a few years ago as being effectively doomed in the face of Amazon. Its primary product range included CDs and DVDs – two product lines I think we can all agree don’t have a bright future.

But JB has done a remarkable job of proving its critics wrong. The company read the writing on the wall accurately and has spent the last decade diversifying into TVs, white goods, home appliances and gaming – all areas less prone to e-commerce disruption. Investors who wrote JB off also didn’t notice that its customers love shopping there, drawn in by things like friendly staff and folksy product recommendations. It also has an extensive, fluid and fun online store.

Investors who took a shot with JB shares in January last year are already up more than 100%. That just proves how betting against the crowd in retail can make you a fortune, if you do it correctly, of course.

Foolish takeaway

So if you have found a potential investment in the ASX retail space, I think asking yourself the kinds of questions we explored today is a great start. There is a lot of company’s on life support in retail right now. But finding the rare winners can be a great place to invest.

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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ltd. The Motley Fool Australia has recommended ltd. 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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