S&P/ASX 200 Index (ASX: XJO) retail shares have seen a lot of pessimism over the last 12 months. But with a number of them trading at much lower share prices, are they now bargain buys?
Take Wesfarmers Ltd (ASX: WES) shares as an example. Wesfarmers is the owner of Bunnings and Kmart. Its share price is 27% lower than it was in August 2021 and it's down 13% compared to mid-January 2022.
.Investors need to ask themselves a few questions.
How much pain are the ASX 200 retail shares really going to report in FY23?
Have the share prices overreacted for what may only be a short-term problem?
Are they now opportunities?
I'm going to look at each of those questions.
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FY23 pain?
ASX 200 retail shares may not see too much pain at all.
Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) generate most of their earnings from supermarkets, which I think means their earnings will be fairly consistent and defensive. Metcash Limited (ASX: MTS), the hardware business and supplier to IGAs, saw a strong first half of its FY23 and reported ongoing growth in the first few weeks of FY23's second half.
Harvey Norman Holdings Limited (ASX: HVN) has started FY23 off with total sales growth in the first four months of the financial year, as did JB Hi-Fi Limited (ASX: JBH), Super Retail Group Ltd (ASX: SUL), and Premier Investments Limited (ASX: PMV) as they cycle against lockdowns in the first half of FY22 when many stores were shut.
Wesfarmers has said its retail store sales are doing well in the first few months of FY23.
Lovisa Holdings Ltd (ASX: LOV) sales and earnings are jumping higher as the company continues its global store rollout.
Breville Group Ltd (ASX: BRG) has said its business is performing to its expectations.
Despite many of them reporting impressive growth, their share prices are lower.
According to the Australian Bureau of Statistics (ABS), retail trade figures for November 2022 showed a 1.4% month-over-month rise in total Australian turnover and a 7.7% rise year over year.
Is it an overreaction?
Inflation and higher interest rates could cause a problem during 2023.
The higher repayments can take a while to flow through to mortgage holders, particularly ones that have been on, or are on, a fixed-rate mortgage. Will we see a sudden drop in retail spending growth? Perhaps even a decline?
It's quite possible. Plus, unemployment could rise. As well, ASX bank share arrears could increase.
Investors could justifiably point to a number of factors that could mean 2023 is not a good year for ASX 200 retail shares.
But the first half seems like it's going to be a solid report for many of the names I've mentioned.
Keep in mind that share prices are meant to reflect the long term, not just what's going to happen in the next six or twelve months.
While higher interest rates are meant to push valuations lower, I think some are too low considering many of these businesses continue to grow their store count and potentially gain from scale benefits.
Are ASX 200 retail shares in the bargain basket?
They aren't as cheap as they were a few months ago. However, I believe any negative hits to earnings will be time-limited to the next 12 to 18 months. A reduction in official interest rates in the future could mean a good boost to sentiment.
I'm very optimistic about the future of Wesfarmers, Premier Investments, Metcash, and Lovisa. So, at the current prices, they'd be the first four I'd buy in the sector.
Smaller ASX retail shares which have been hit even harder over the last year could be even more tantalising opportunistic ideas to consider at the lower share prices.
