Morgans has been running the rule over the retail sector this month following a review of earnings season.
This has seen the broker pick out a number of ASX retail shares as "key picks." But before we look at these shares, let's hear what the broker is saying about the sector.
Morgans notes that it was a mixed earnings season for consumer discretionary companies. It said:
Through August, we saw investors generally become more positive on the outlook for the consumer, with a recovery in sales towards the backend of FY24 and continuing a positive trajectory into the first couple of months of FY25. Share prices were volatile though, with notable stand out performers and laggards. Sales were in line with forecasts and up yoy, but earnings were down driven by inflationary cost pressures, although better managed than expectations.
But one positive was that retail shares paid out better than expected dividends, which the broker believes is a boost to confidence. It adds:
Dividends in FY24 were much better than expected which may indicate that companies are confident in the stability of earnings and cash flow despite no meaningful sign of a recovery in earnings yet. Generally, companies reported a positive start to the year, albeit comping a weak corresponding period. However, they did undershoot our expectations, resulting in lowering our EPS forecasts by (2.4)% (median).
Which ASX retail shares could be buys?
Morgans has named three ASX retail shares as key picks.
The first is specialist retailer Beacon Lighting Group Ltd (ASX: BLX), which the broker has an add rating and $3.15 price target on. It commented:
Beacon Lighting continues to drive strong growth in Trade sales, offsetting softness in Retail sales in a subdued consumer market to result in a stable LFL performance. Gross margins were surprisingly robust in FY24 and we expect this to be sustained in FY25. Beacon Lighting continues to take share and we think it is well positioned to achieve strong earnings growth when consumer sentiment turns.
Another share that gets the thumbs up is Super Retail Group Ltd (ASX: SUL). Morgans has an add rating and $19.79 price target on the Rebel and Supercheap Auto owner's shares. It said:
A positive update from SUL, supporting its recent strong share price appreciation and pointing to continued momentum into FY25. We continue to maintain a positive disposition on the stock and view it as well positioned to capitalize on any improvements in underlying macro conditions.
Finally, the broker thinks that youth fashion retailer Universal Store Holdings Ltd (ASX: UNI) is a buy. It has an add rating and $8.10 price target on its shares. It commented:
The strong result could be attributed to sales growth of 9.7%, improved gross margins, up 110 bps to 60.1% and well managed costs. UNI declared a dividend of 18.5c bringing the total to 35.5c which was up 25.6% and ahead of our expectations. The strong momentum seen in 2H has continued into the first 7 weeks of FY25, with double digit like-for-like (LFL) growth across all brands.
