Australian shoppers are returning to the stores with consumer confidence at three-year highs, Wilsons Advisory says, but that doesn't mean all retail stocks represent good buying themselves.
The broker has singled out KFC owner Collins Foods Ltd (ASX: CKF), Universal Store Holdings Ltd (ASX: UNI), and Austosports Group Ltd (ASX: ASG) as good buying at the moment, based on their expected compound annual growth rates out to FY28 and their price-to-earnings (P/E) ratios.
But there are two major stocks that the broker says are looking expensive at the moment.
Wilsons Advisory ran the ruler over 20 stocks in the consumer discretionary universe in total, and right at the bottom, by its measure, were JB Hi-Fi Ltd (ASX: JBH) and Wesfarmers Ltd (ASX: WES).
We saw a clear improvement in consumer spending throughout the August 2025 reporting season, with the latest trading updates from across the consumer discretionary sector showing accelerating sales momentum. Encouragingly, momentum has been broad-based, spanning everything from apparel and accessories (Universal Store, Lovisa), electronics (JB Hi-Fi), big-ticket items like furniture and house goods (Temple & Webster, Harvey Norman, Adairs, Nick Scali) and autos and accessories (Eagers, Autosports Group).
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Rate cuts bolster spending
Wilsons says card spending data released by Commonwealth Bank of Australia (ASX: CBA) showed a marked increase in discretionary spending across all age cohorts under the age of 65 between April and June this year, "which indicates interest rate cuts are translating to stronger consumption among mortgage holders''.
But all this good news will not necessarily translate to more share price upside for the two major retailers, JB Hi-Fi and Wesfarmers, which own businesses including Bunnings, Kmart, and Target.
While the consumer discretionary sector's earnings outlook has started to materially improve, this needs to be balanced against generally demanding valuations, particularly within the retail sector. Most notably, index heavyweight Wesfarmers has re-rated to a forward price to earnings ratio of about 37 times, which is comfortably a new all-time high for the business, well above prior cycle highs and its long-run trading range of about 15-20 times.
Wilsons says JB Hi-Fi's forward P/E ratio is also high by historical standards at about 25 times, which is a post-GFC high and comfortably above its long-run trading range of about 10 to 15 times.
While both businesses are among Australia's highest quality retail businesses – as 'category killers' in their respective segments with strong competitive advantages supporting continued market leadership – elevated earnings multiples create a balanced risk/reward trade-off at this juncture. Accordingly, notwithstanding their quality and the supportive macro dynamics, the Focus Portfolio has zero exposure to both these names due to valuation concerns.
