There are some ASX retail shares that could be strong contenders to consider at the current prices.
Businesses in the retail sector have the potential deliver attractive profit growth but may come with a lower price/earnings ratio.
Companies that are growing in size, particularly with their digital sales, could be ones to think about:
Baby Bunting Group Ltd (ASX: BBN)
Baby Bunting is a leading retailer of products for babies, toddlers and families. Think of items like clothes, toys, prams and furniture.
In FY21, the ASX retail share delivered sales growth of 15.6% and pro forma net profit growth of 34.8% to $26 million.
It currently has a national store network of 60 Baby Bunting stores in Australia. The plan is to grow the network to around 100 stores around Australia in various formats.
Baby Bunting recently commissioned a new national distribution centre and store support centre in the second half of FY21, doubling its distribution capability and reducing the reliance on third party logistics. Supply chain capability is a key driver of continued gross profit margin growth.
Digital sales increased by 54.2% to $90.8 million, making up around 20% of the ASX retail share’s total sales. Private label and exclusive product sales grew 31.1% to be 41.4% of overall total sales in FY21 – it’s aiming for 50% in the longer-term.
It’s expecting to open three new stores in Australia in the first half of FY22, with another two in New Zealand.
Baby Bunting’s profit margins continue to increase. In FY21, its pro forma cost of doing business ratio improved by 14 basis points to 27.8%. The gross profit margin also went up 83 basis points to 37.1%.
It’s currently rated as a buy by Morgan Stanley, with a price target of $6.90. It’s valued at 23x FY23’s estimated earnings.
Wesfarmers Ltd (ASX: WES)
Wesfarmers owns a number of high-quality retailers including Officeworks, Kmart Group and Bunnings.
All three divisions had a strong year in FY21. Officeworks earnings before tax (EBT) rose 7.6% to $212 million, Kmart Group EBIT increased 69% to $693 million and Bunnings EBT went up 19.7% to almost $2.2 billion.
In FY21, looking at continuing operations, excluding significant items, revenue rose 10% and net profit after tax grew 16.2%.
Each of Wesfarmers’ divisions continue to invest for the customer experience, make the supply chain more efficient and improve the digital offering.
The ASX retail share is expecting to spend around $100 million over FY22 which is aimed to accelerate the development of a data and digital ecosystem, which aims to provide customers a more seamless and personalised digital experience across the retail businesses.
Trading is currently being impacted by lockdowns in Sydney and Melbourne, however the retail divisions are “well positioned” for the resumption of normal trading as lockdowns and restrictions ease.
Wesfarmers says that its current portfolio of businesses are cash-generative businesses with market-leading positions, making it well positioned to withstand a range of economic conditions and “deliver satisfactory shareholder returns over the long-term”.
The ASX retail share is also looking to continue to develop and enhance its portfolio by pursuing investments and transactions that will create value for shareholders over the long-term. For example, it’s currently trying to take over Australian Pharmaceutical Industries Ltd (ASX: API) for $1.55 per share. This will form the start of a new healthcare division which will focus on health, wellbeing and beauty.
At the current Wesfarmers share price, it is valued at 27x FY23’s estimated earnings.