Embattled ASX 200 retail shares primed for a comeback: experts

Brokers are tipping a brighter future for some retail shares…

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Key points

  • ASX 200 retail shares have copped a beating in the last six months as analysts downgraded their earnings outlook
  • But there are some in the sector that could outperform despite the economic headwinds, according to experts
  • Brokers think Super Retail, Harvey Norman and City Chic are looking like bargains for FY23

The brutal second half of FY22 has battered ASX 200 retail share prices, but experts believe some are poised to make a comeback in this new financial year.

The surge in the cost of living, slowing economic growth and the threat of falling home values is sapping consumer confidence.

This has prompted brokers to cut their earnings forecasts for S&P/ASX 200 Consumer Discretionary Index (ASX: XDJ) shares.

ASX 200 retail shares in the reject bin

Little wonder that around 85% of shares in the sector have underperformed the 13% drop in the S&P/ASX 200 Index (ASX: XJO) in the last six months.

Some of the worst performers include the Domino’s Pizza Enterprises Ltd (ASX: DMP) share price and Breville Group Ltd (ASX: BRG) share price. The fast-food chain and the home appliance group shed more than 40% of their value in 2H FY22.

Meanwhile, the Wesfarmers Ltd (ASX: WES) share price and Lovisa Holdings Ltd (ASX: LOV) share price have shed around 30% each.

A few tailwinds

However, analysts believe the bad news is already priced into ASX 200 retail shares following the sell-off.

JP Morgan also noted that consumers have a $250 billion savings buffer to draw on, reported the Australian Financial Review. Its analysts Bryan Raymond and Chris McKegg said:

The optics around year-on-year declines will clearly be large given the very high base, but we expect the trough sales and margin levels in the financial year 2024 to be better than share prices are factoring in.

Another broker that’s cautiously optimistic is Wilsons. Its analyst John Hynd thinks the market reaction over the last four to six months looks “pretty extreme”, according to the AFR.

Hynd explained:

The [retail spending] data continues to surprise on the upside, given we saw variable interest rates increase in May and the consumer has that expectation that rates are going to continue to increase – yet they’re still willing to spend.

However, I think it’s too early to call whether consumers will be resilient through the rate cycle.

ASX 200 retail shares to watch in FY23

Nonetheless, both brokers see value in the sector. JP Morgan likes the Super Retail Group Ltd (ASX: SUL) share price and Harvey Norman Holdings Limited (ASX: HVN) share price.

Meanwhile, Wilsons’ top pick is the City Chic Collective Ltd (ASX: CCX) share price. It reckons the plus-size clothing retailer can weather the economic turmoil due to its niche offering, sticking customers and high-quality offering.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Harvey Norman Holdings Ltd. and Super Retail Group Limited. The Motley Fool Australia has positions in and has recommended Harvey Norman Holdings Ltd., Super Retail Group Limited, and Wesfarmers Limited. The Motley Fool Australia has recommended Dominos Pizza Enterprises Limited and Lovisa Holdings Ltd. 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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