Economic uncertainty is hanging heavy over consumers, but there are three ASX retail shares that are likely to outperform, according to a top broker.
Never mind the invasion of Ukraine, inflation pressure and the prospect of rising interest rates. This isn't the time to be avoiding the consumer discretionary sector.
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Why some ASX retail shares will outperform in 2022
If anything, ASX retail shares have delivered pretty good profit results last month. Morgans noted that the companies in the sector that it covered delivered earnings that were on average 5.7% above its forecasts.
"In an environment of waning consumer confidence, the winners in the retail space are likely to be those that can achieve profitable growth through the expansion of their network (or digital presence)," said Morgans.
"Or a move into adjacencies that increase the size of their total addressable market."
The top 3 ASX retail shares to buy in this environment
For this reason, the Lovisa Holdings Ltd (ASX: LOV) share price is among the broker's top picks for the sector.
Morgans believes the costume jewellery retailer may prove to be one of the biggest success stories in Australian retail.
"With ambitious (and financially wellincentivised) new leadership in place, we think now is the time for LOV to step up to become a global force," said Morgans.
"Investment will be needed to expand LOV's network in the US and Europe and to take it into new markets, but the returns could be stellar."
Cost pressure not a big risk
Another ASX retail share on the broker's top buy list is the Universal Store Holdings Ltd (ASX: UNI) share price.
The broker believes it has a strong competitive advantage in youth fashion apparel. It is also relatively resilient against rising costs.
"Margins are likely to benefit from the rising proportion of private label products in store as well as, in due course, operating efficiencies from the growth of the network and the launch of a new distribution centre," said Morgans.
More defensive than most
Finally, the Baby Bunting Group Ltd (ASX: BBN) share price is another on Morgans' best buy list.
Baby Bunting is the only national specialist baby retailer and it has less than 10% of the $5.1 billion market.
Morgans believes it is well placed to take market share thanks to its strong brand equity. It's also worth noting that baby products are more defensive than many other consumer goods.
