My prediction for ASX retail shares in 2024

Is 2024 going to be a rough year for retailers?

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The ASX retail share sector is facing an uncertain outlook following all of the inflation and higher interest rates. However, that doesn't mean the share prices can't do well. Let's have a look at how things are shaping up for the industry.

Trading updates from some of the companies have been disappointing, but likely expected by the market – that's probably because the share prices have been sent down compared to their COVID-19 highs.

Weak start to FY24

These numbers are from the first few months of the 2024 financial year compared to the prior corresponding period.

Adairs Ltd (ASX: ADH) said its total sales in the first 21 weeks were down 9%.

JB Hi-Fi Limited (ASX: JBH) said its The Good Guys sales were down 12.2%, while JB Hi-Fi Australia sales were down 0.1%.

The Harvey Norman Holdings Limited (ASX: HVN) aggregated sales were down 7.8%.

Nick Scali Limited (ASX: NCK) group written sales orders were down 5.4%.

It's a similar story for many brick-and-mortar discretionary retailers across Australia.

According to reporting by the Australian Financial Review, the amount of disposable income that households have has fallen to 2015 levels, so it's no wonder people are spending less at stores.

Unless interest rates are significantly cut in the early part of 2024, I can't see this sales trend reversing over the rest of FY24 – for most retailers, that only refers to the first six months of the calendar year because the financial year runs from July to June for a lot of them.

Are there any positives for ASX retail shares?

I think there are some positives.

First, some businesses can offset a bit of the pain by opening stores in locations where they won't cannibalise their own sales to help support total sales. For example, Lovisa Holdings Ltd (ASX: LOV) reported comparable store sales declined by 6.2% in the first 20 weeks of FY24, but total sales were up 17%. It managed this thanks to a large increase in store openings in the prior 12 months.

Second, retailers focused on digital sales are doing really well. For example, Temple & Webster Group Ltd (ASX: TPW) is seeing very strong sales growth – for 1 July to 27 November, total sales were up 23% and in the second quarter, sales were up 42%.

Finally, I believe that while we're in an uncertain time, I don't believe weak retail sales will last forever, so there could be a recovery in the longer term, particularly with the number of potential shoppers in Australia growing strongly as the population rapidly increases.

Could the sector perform well?

It's very difficult to predict what is going to happen with share prices, particularly as sales are dropping at a number of those ASX retail shares.

We've seen share prices fall a long way, so from here, the performances could be quite variable depending on the numbers they're able to report.

I expect there will be plenty of volatility in 2024, and we may well not see a recovery in the financials during next year.

But, I believe a recovery is getting closer every month that goes by, and at some point that could spell good news for those retailers. Share prices can do well even if the numbers reported seem negative.

I predominately invested at lower share prices than today, but I've put my money to work in Temple & Webster, Lovisa and Accent Group Ltd (ASX: AX1) because I thought they were good value at the time on a two-year or three-year outlook (and the longer-term).

Motley Fool contributor Tristan Harrison has positions in Accent Group, Lovisa, and Temple & Webster Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Adairs, Lovisa, and Temple & Webster Group. The Motley Fool Australia has positions in and has recommended Adairs and Harvey Norman. The Motley Fool Australia has recommended Accent Group, Jb Hi-Fi, Lovisa, Nick Scali, and Temple & Webster Group. 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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