ASX consumer discretionary shares have suffered a tough 12 months.
The sector has faced several headwinds over the past year.
Image source: Getty Images
Why are consumer discretionary shares struggling?
Some of the major contributors have been high interest rates, weaker consumer confidence, pressure on household budgets, and growing evidence that retail earnings are softening.
Consumer discretionary shares rely on consumer confidence because they sell non-essential products that consumers can easily delay or cut back on when they feel uncertain about their finances.
Lower interest rates can reduce mortgage and debt repayments, giving consumers more disposable income to spend on clothing, dining, and entertainment.
As a result, falling rates, stronger employment and improving consumer confidence can increase discretionary spending and support retailers' sales and earnings, while the opposite can hurt them.
One such consumer discretionary stock affected by these pressures is Lovisa Holdings Ltd (ASX: LOV).
The fashion jewellery and accessories retailer has seen its share price fall 42% in the last 12 months.
However, a new report suggests it could be a rebound candidate.
Bell Potter optimistic
Overall, Bell Potter believes this option stands out amongst the retail sector because of its global expansion potential, attractive gross margins and low-price-point proposition.
The broker said the key attraction is Lovisa's international growth opportunity, particularly in the US and UK. Bell Potter sees significant room to expand beyond the current ~250 US stores, while the UK could benefit from the exit of a major competitor.
They also expect relatively easier comparable-sales conditions in the coming months, which could help Lovisa maintain its strong start to FY27.
We continue to see further prospects arising from changes in the US/UK/South African competitor environment with the exit of the key competitor, offsetting risks in the Australian market with a fast growing competitor.
While we remain cautious on the current weak consumer landscape and investments into market share & store refits to mitigate competitive pressures in key markets, we see a higher tolerance re accessibility from a low price point perspective together with a strong gross margin. LOV stands out in our coverage as a global retailer scaling its presence from ~50 regions with strong US/UK performance with better efficiencies within the US store network.
Healthy upside
At the time of writing, Lovisa shares are trading at approximately $22.87.
However, the broker has a buy rating and $27.00 price target on the consumer discretionary stock.
This indicates a healthy upside of 18%.
