Morgans names 8 ASX retail shares to buy

Thing could be going better than you think for Aussie retailers…

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Key points

  • Morgans believes that the retail sector could have performed strongly in the first half of FY 2023
  • The broker also suspects that the market is too negative on the sector's prospects in the second half
  • Its analysts have named eight consumer discretionary shares to buy

The team at Morgans has been looking over the consumer discretionary sector ahead of earnings season.

The good news for investors is that the broker is positive on the sector as a whole. So much so, it has named a total of eight ASX retail shares to buy right now.

What is Morgans saying about ASX retail shares?

Morgans notes that consumer spending has remained surprisingly strong despite rising interest rates. This even led to the biggest Christmas period for retailers on record in 2022. It commented:

Australian consumer sentiment has been in the doldrums. Preoccupied by the impact of higher home loan and rental payments on household finances already feeling the effects of the highest rates of inflation in 30 years, consumers indicated throughout 2022 that they intended to tighten their belts and pull back on their discretionary expenditure.

And yet, retail sales continue to rise faster than market expectations. The Australian Retailers Association recently commented that last Christmas saw 'without a doubt the biggest festive spend on record'.

In light of the above, the broker suspects that a number of ASX retail shares could report strong results next month.

Combined with the prospect of inflation easing and the RBA slowing its interest rate hikes, it believes analysts may be forced to upgrade their earnings estimates meaningfully. It explained:

We do expect consumer demand to soften over the course of 2023, especially as a high proportion of fixed rate mortgages roll off.

But with the prospect of inflation easing and with the possibility that the RBA will pause its relentless series of rate hikes, we think the market may have overestimated the extent of the weakness in the year ahead.

We could see earnings upgrades in the retail sector during February as analysts adjust to better than expected numbers in 1H FY23 and the emerging prospect of a more gentle decline in 2H FY23.

Which shares should you buy?

The eight ASX retail shares in the consumer discretionary space that Morgans rates as a buy are as follows:

However, of the eight, its key picks are Beacon, JB Hi-Fi, and Universal Store.

Commenting on Beacon, for which it has an add rating and a $2.60 price target, the broker said:

The potential of the trade strategy is underestimated. We expect it will allow BLX to continue to grow earnings positively even as retail demand softens.

As for JB Hi-Fi, which the broker has an add rating and $53.00 price target on, Morgans said:

We think the market overestimates the extent of the likely slowdown in sales in 2H23, resulting in a P/E that's too low and a dividend yield that's too high.

Finally, Universal Store, which Morgans has an add rating and $6.70 price target on, the broker commented:

We believe this is one of the most underrated retailers on the ASX. It offers network growth, resilient demand, price and cost discipline.

Motley Fool contributor James Mickleboro has positions in Domino's Pizza Enterprises. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Domino's Pizza Enterprises, Lovisa, and Super Retail Group. The Motley Fool Australia has positions in and has recommended Super Retail Group. The Motley Fool Australia has recommended Domino's Pizza Enterprises, Jb Hi-Fi, and Lovisa. 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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