Times are tough: Should I avoid ASX retail shares right now?

It could be time to put some of these stocks in the shopping basket.

Worried ASX share investor looking at laptop screen

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Key points

  • Economic conditions are increasing concerns about retailers
  • Luxury-focused stocks like Cettire and Treasury Wine Estates could still do well
  • I think sold-off names like Adairs and Premier Investments could be solid contrarian ideas right now amid general investor fear

ASX retail shares have seen plenty of pain and disruption over the last few months with falling share prices hitting the sector hard.

But sometimes a sell-off can actually end up being an opportunity, so it's worthwhile considering whether this is one of those times.

We've seen double-digit declines in 2023 for many names like Adairs Ltd (ASX: ADH), Premier Investments Limited (ASX: PMV), Universal Store Holdings Ltd (ASX: UNI), and Dusk Group Ltd (ASX: DSK).

Some of the declines have been triggered by trading updates which revealed a concerning drop-off in sales and foot traffic in stores.

The market is pricing in some serious financial pain for these companies. As an example, Dusk is down 37% this year, as we can see on the chart below.

Is this a good time to invest in ASX retail shares?

The Australian Financial Review recently reported on comments by MST Marquee analyst Craig Woolford who said:

It's inevitable that a majority of retailers are likely to see a decline in profitability in fiscal 2024 but they're coming from a very strong starting point because profitability has been very strong for a majority of retailers.

While the short to medium term may seem uncertain, it has been suggested this may be a good period for retailers to invest in artificial intelligence and generative AI.

Australian Retailers Association CEO Paul Zahra told the AFR that "artificial intelligence is the next biggest thing. What it will do is reduce costs and improve the service outcome as well".

Temple & Webster Group Ltd (ASX: TPW) is one ASX retail share looking to use AI to boost its margins and improve customer service.

The AFR also reported comments by UBS analyst Shaun Cousins, with data showing consumers had "really tightened their belts from April and May" because of interest rate rises. Cousins said:

We believe it's a combination of cost of living pressures that have existed for almost 12 months and now intensified.

While we've had a strong labour market the support of savings has moderated and we think all consumers will change the way they spend. We believe the very affluent are unlikely to change much at all, the less affluent will be under greater pressure as they've got less buffer to handle rising living costs.

Cousins suggested Treasury Wine Estates Ltd (ASX: TWE) is one option for investors with the winemaker's customer base being quite affluent.

Another option that could keep doing well is luxury online retailer Cettire Ltd (ASX: CTT) which I recently covered.

The UBS analyst also said Wesfarmers Ltd (ASX: WES) could be a solid option during lean economic times because its brands Kmart and Bunnings are focused on providing value to customers. This could mean they win market share during this period.

Foolish takeaway

I think most ASX retail shares are looking attractive at the moment, with the ones that have sold off being opportunities on a two-year or three-year view. The added benefit is the larger prospective dividend yield in FY25 from names like Adairs and Premier Investments.  

With the market currently quite fearful, it could be a good time to be greedy.

Motley Fool contributor Tristan Harrison 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 Adairs, Temple & Webster Group, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Adairs and Wesfarmers. The Motley Fool Australia has recommended Cettire, Dusk Group, Premier Investments, Temple & Webster Group, and Treasury Wine Estates. 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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