Overinvested in Wesfarmers shares? Here are two alternative ASX stocks with big growth potential

I'm a big fan of these 2 stocks for their income and growth potential.

| More on:
Two happy woman looking at a tablet.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

I regularly like to call Wesfarmers Ltd (ASX: WES) one of the best investments on the ASX. It's not surprising to me that the Wesfarmers share price has risen 71% over the past five years due to the strength of the ASX stock's underlying retail businesses of Bunnings and Kmart.

However, when a stock rises significantly, it can become a bigger part of someone's portfolio. That can be a good thing, but it would also be understandable for someone to want a bit more diversification if the portfolio becomes too focused on one business.

The retail sector could still be an appealing place to look for opportunities for a medium-term investment because when interest rates start coming down, it could lead to an increase in retail spending by Aussie households.

So, below are two of my favourite ASX retail stocks.

Universal Store Holdings Ltd (ASX: UNI)

This company says it owns a portfolio of premium youth fashion brands, which offer a carefully curated selection of on-trend apparel products to target 16 to 35-year-old fashion-focused customers. It has 102 physical stores across Australia.

Its businesses include Universal Store, CTC (trading as THRILLS and Worship) and Perfect Stranger.

The ASX retail stock has delivered an extraordinary performance considering the difficult trading environment amid high interest rates and elevated inflation.

In FY24, the company reported sales growth of 9.7% to $288.5 million, underlying profit (EBIT) growth of 16.6% to $47.1 million and statutory net profit growth of 45% to $34.3 million.

I thought this result was impressive in a number of ways, including the operating leverage the company demonstrated, where its margins increased, enabling profit to rise much faster than sales.

The trading update for FY25 was also very promising. Universal Store sales were up 15.3%, with like-for-like (LFL) sales growth of 12.5%, while Perfect Stranger sales were up 89.9%, with LFL growth of 24.2%. I think this level of growth bodes well for the future because its products are clearly resonating with customers.

In FY25, it's also working on improving its gross margin, introducing new brands, and reducing its cost of doing business.

Nick Scali Limited (ASX: NCK)

Nick Scali sells furniture through a number of brands, including Nick Scali, Plush, and Fabb Furniture in the UK (following the acquisition).

This ASX retail stock is looking to steadily add to its store networks, particularly with Plush stores in Australia and to grow its UK store network.

Pleasingly, in the first four months of FY25, ANZ written sales orders were 3% higher, with both August and September showing an increase year over year. It's planning to open two Nick Scali stores and between three to five Plush stores in FY25. Freight rates may be higher right now, but I think it will be a shorter-term issue. 

The UK currently has a challenging trading environment, but Nick Scali is already boosting margins there and it expects further improvement as more Nick Scali product is rolled out to stores. It's also looking to reduce costs in its UK business.

Nick Scali said it has moved to the same outsourced delivery model in the UK as ANZ which will "improve the efficiency and scalability of deliveries to customers." In the recent trading update, Nick Scali said regarding its UK operations:

Our strategy is to transform the business to the Nick Scali business model and leverage group capabilities for efficiency and scale before focusing on expansion of the UK showroom network. However, should an attractive new UK showroom location opportunity present, we will consider it.

I think the ASX retail stock has the room to significantly grow profit in the UK and ANZ over the next three to five years.

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 Wesfarmers. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Nick Scali. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Retail Shares

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Retail Shares

Up 90%, this ASX 200 retail stock's CEO just sold $500,000 worth

What could this mean?

Read more »

View of a mine site.
Retail Shares

Why buying Wesfarmers shares could provide unique lithium exposure

In the last 12 months, the stock has rallied more than 28%.

Read more »

Photo of two women shopping.
Retail Shares

Why one leading fund manager thinks this fallen ASX All Ords stock is a turnaround buy

This is a bargain stock, according to a leading fundie.

Read more »

a woman wearing fashionable clothes and jewellery checks her phone with a satisfied smile on her face in a luxurous home setting.
Retail Shares

Guess which ASX 200 stock just extended its $580 million buyback

Could this draw investor attention to the stock?

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Retail Shares

Own Wesfarmers shares? Here's why Bunnings' monster profits are raising eyebrows

Bunnings is the jewel in Wesfarmers’ crown. Some people are questioning whether it should sparkle as much as it does.

Read more »

Woman checking out new laptops.
Retail Shares

Harvey Norman shares see red on ASIC case update

This could put the saga to rest.

Read more »

A man looking at his laptop and thinking.
Retail Shares

Why this investing expert is cashing in some gains on Wesfarmers shares

The ASX 200 stock is up more than 27% over the past 12 months.

Read more »

A woman looks at a tablet device while in the aisles of a hardware style store amid stacked boxes on shelves representing Bunnings and the Wesfarmers share price
Retail Shares

Why today is a big day for Wesfarmers shares

Why is everyone talking about Wesfarmers shares today?

Read more »