I'd buy these ASX retail shares if economic fragility starts a fire sale

An economic hiccup could present a golden opportunity to buy these quality retailers.

Mitchell Lawler

Mitchell stumbled upon the concept of investing when in high school, devotedly urging his parents to put some money into a handful of technology companies with increasingly popular products among his demographic – many of which have gone on to great success. It wouldn’t be until 2017, some five years later, that Mitchell became an investor of his own money. Having studied and worked as a mechanical engineer in the building services industry, Mitchell takes a methodical and analytical approach to evaluating businesses. Rather than relying purely on numbers, Mitchell drills beyond a company’s metaphorical mantle to unearth obscure patterns or competitive advantages that would go otherwise unnoticed. His expertise resides within areas such as software, consumer goods, and building services equipment. However, his quest to find quality companies that set the industry standard and flex some degree of an impenetrable position has no limits – small cap to mega cap, cosmetics to healthcare – if it’s an exceptional business it’s on his radar.

Published May 12, 2024 6:30 am AEST

My endless hunt for wealth creation has led me to ASX retail shares more recently.

Investors decimated the industry yesterday, slicing 2.5% off the consumer discretionary sector. Disappointing sales updates from a handful of listed retailers, such as JB H-Fi Ltd (ASX: JBH) and Super Retail Group Ltd (ASX: SUL), spooked the market following weak retail trade data last month.

There's a wise Japanese proverb I reflect on in uneasy times: "Fear is often greater than the danger itself". Humans are wired to amplify a perceived threat so that we might live another day. This innate response can lead to overreactions in the stock market.

Those rare moments of disproportional distress are where transformative investments can be made.

Young people shopping in mall and having fun. — Image source: Getty Images

3 ASX retail shares ready for rough times

Suppose we fall on hard times in the near future. Some companies will be positioned better than others. However, there's every chance investors will sell indiscriminately, overcome with fear.

That's why it is valuable to prepare for the storm. Know which companies are likely to withstand the catastrophic forces ahead of time. Doing so gives you an edge over others who will be paralysed by panic.

Batten down the balance sheet

Recessions can destroy businesses. When sales dry up quicker than expenses can be reduced, a company can be caught with insufficient cash to fund its operations. That's where a pile of cash and little debt can be a game-changer.

I think Premier Investments Limited (ASX: PMV) is an ASX retail share in tip-top financial shape. The owner of Peter Alexander, Just Jeans, and Portmans — among others — recorded $492 million in cash and $69 million in debt at the end of the first half.

A strong balance sheet paired with above-industry average profit margins gives me confidence Premier Investments would make for an opportune investment amid a sell-off.

Staying on budget

People will often trade down in a weaker economy rather than go completely without. Savvy shoppers begin looking for the best bang for their buck, giving the right retailers a boost.

I believe Lovisa Holdings Ltd (ASX: LOV) is a prime candidate for a more frugal shopper. The jewellery seller is a more affordable option without compromising on the desired look. Furthermore, the company is now in a net cash position, reducing its debt from its previously lofty level.

Making it last

Buying a brand-new car is the last thing someone wants to do when money is tight. For this reason, automotive retailers are often dubbed 'recession-resilient', as people choose to repair rather than replace.

Super Retail Group Ltd (ASX: SUL) reported mixed sales growth yesterday in its second-half trading update. Some analysts are labelling the owner of Supercheap Auto, BCF, Macpac, and Rebel as overvalued after these figures.

Meanwhile, I'm prepping my account to buy this ASX retail share if the market punishes it further. The Supercheap Auto business is best-in-class, in my opinion. Additionally, Super Retail Group is now sitting on $321 million in cash (and no debt), giving it plenty of financial headroom for hard times.

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