3 ASX retail shares that could benefit from potential interest rate cuts

Would you buy more shoes, sports gear, or furniture if interest rates fall?

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Hopes for interest rate cuts are once again on the horizon after Canada and Europe's rate cuts earlier this month.

Lower interest rates are often seen as making money more accessible and could potentially boost consumer spending.

Central banks are contemplating these cuts in the hope of freeing up more money for consumers, thereby stimulating economic growth.

While predicting macroeconomic trends is almost pointless, investors can certainly assess which ASX retail shares could benefit from a potential uptick in consumer spending. Let's explore.

Nick Scali Limited (ASX: NCK)

First up is furniture retailer Nick Scali. In 1H FY24, the company reported a 20% drop in revenue to $227 million. To be fair, this was off a high base a year ago when it reported a record revenue of $284 million, as the company benefitted from increased deliveries of the previous orders.

That said, its written sales orders — a leading indicator — were just up 1.1%, and they were down slightly by 0.4% on a same-store basis.

The good news is that the company has improved its costs. Gross margins rose from 62% in 1H FY23 to 65.6%, while general operating expenses fell by $4.8 million from a year ago. Tight cost control and better logistics costs were behind such impressive margin expansion.

The company started to see an uptick in its orders. In 2Q FY24, from October to December 2023, its written sales orders rose 8.2% from a year ago.

This sales momentum may continue if potentially lower interest rates lead to better consumer sentiment.

Nick Scali recently expanded into the United Kingdom market by acquiring Fabb Furniture, as my colleague James highlighted. This may be a wild card in the short term, depending on consumer sentiment in the UK. However, for the longer term, the company believes this provides a great expansion opportunity to a bigger UK market.

Nick Scali shares are trading at 13x trailing earnings. The Nick Scali share price is down 2.46% at $13.46 at the close on Monday.

Super Retail Group Ltd (ASX: SUL)

Next up is Super Retail Group, which owns popular retail brands like Super Cheap Auto, Macpac, Rebel and BCF.

Super Retail tends to do better than other consumer discretionary companies across economic cycles, as my colleague Sebastian pointed out.

In its May trading update, the company said its like-for-like sales growth was largely flat, with BCF experiencing a 5% decline and Macpac experiencing a 3% growth.

Super Retail Group CEO Anthony Heraghty said that while store foot traffic and transaction volumes continued to grow, the ongoing cost-of-living pressure was impacting a number of items per sale.

But the resilience of the business was insufficient to keep investors excited amid overall consumption weakness.

The Super Retail Group share price has fallen 16.37% year-to-date, putting its valuation at a price-to-earnings ratio of 11.54 times based on FY24 earnings estimates by S&P Capital IQ.

This is cheap compared to its historical trading range of 8 times and 20 times. Excluding the Great Financial Crisis of 2008 and the COVID-19 outbreak in March 2020, the stock has rarely traded below 10x on a forward basis.

At the close of trading, the Super Retail Group share price was trading at $13.28, offering a dividend yield of 5.72%.

Accent Group Ltd (ASX: AX1)

Lastly, let's talk about shoe seller Accent Group, a company behind well-known brands like The Athlete's Foot, Platypus Shoes, Hype DC, and Skechers.

In 1H FY24, the company reported a 2.7% growth in its revenue to $811 million, but its operating profits took a bigger hit, falling 20% to $72.4 million.

The company mentioned its cost of doing business increased due to negative like-for-like retail sales, lower wholesale sales and cost inflation.

However, given its extensive store network, this could be reversed if consumers returned to their stores to buy more shoes.

Based on FY25 earnings estimates by S&P Capital IQ, Accent Group shares are trading at a P/E ratio of 14 times.

Dividends are an added bonus. Bell Potter seems to like Accent Group for its dividends. As my colleague James noted, the broker forecasted dividends of 13 cents per share (cps) in FY24 and 14.6 cps in FY25. At the current share price, these represent 6.7% and 7.5%, respectively.

The Accent Group share price closed on Monday down 1.53% at $1.93.

Motley Fool contributor Kate Lee has positions in Nick Scali. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Super Retail Group. The Motley Fool Australia has positions in and has recommended Super Retail Group. The Motley Fool Australia has recommended Accent Group and Nick Scali. 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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