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3 retail stocks you may want to reconsider

Glenn Freeman  |  21 Feb 2017Text size  Decrease  Increase  |  

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Despite one of these non-moated retailers anticipating a more positive interim and FY17 result than the market might have expected, persistent headwinds for the sector show little sign of abating.

 

Year-on-year retail sales volumes were up just 3 per cent in December last year, adjusted for spikes during Christmas and other holiday periods, according to Australian Bureau of Statistics data released in early February.

The department store segment's performance fell around 6 per cent behind the retail sector average, to negative 3 per cent for the year to December 2016--not auguring well for category leaders David Jones or Myer Holdings (ASX: MYR).

Morningstar equity analyst Johannes Faul expects Myer's headline sales growth to increase around 2.4 per cent in fiscal 2017. It will report first-half results in March this year.

As of February, the stock price of $1.25 is close to Morningstar's $1.20 fair value, and Faul anticipates retail weakness to remain in the longer term.

Myer is not awarded a moat rating, "owing to the increasingly intense competition from online and international specialty retailers, such as clothing labels H&M, Zara, and Uniqlo, or cosmetics chain Sephora," he said.

"Improvements made in the first few years of Myer's current five-year turnaround represent harvesting of the low-hanging fruit, and we expect EBIT margin expansion to stall at 3.8 per cent from fiscal 2022, with long-term sales growth estimated at 2 per cent per year," Faul said.

He also points to the high degree of uncertainty around Myer's future value, due to the threats mentioned above: "We view any near-term bounce back in retail expenditure as an opportunity for investors to reduce holdings."

Super Retail Group (ASX: SUL) operates in Australia and New Zealand, selling automotive accessories and sporting goods, along with camping, fishing, and boating equipment.

Morningstar equity analyst Tony Sherlock sees attractive aspects of the overall business, "particularly as the firm accrues some cost and scale benefits from being the clear market leader in sporting apparel and equipment, and outdoor leisure goods".

However, he believes prevailing economic conditions in Australia are "unsustainably strong, which is why we forecast moderating like-for-like sales growth going forward".

"Ongoing advancements in digital services and in the third-party logistics industry means it will become easier for Australians to purchase sporting goods online. At this juncture, Super Retail's two brands, Rebel and Amart Sports, lead in this area, but should Amazon establish a presence in Australia, it would materially impact sporting goods sales and margins," he said.

"The store rollout and value proposition are currently offsetting the online threat, but we do not believe the high revenue growth achieved in the past can be sustained during a five- to 10-year time frame."

In a note issued to the market in early February, global retailer Premier Investments (ASX: PMV) foreshadowed an expected earnings increase of 7 per cent year-on-year for the first half of fiscal 2017, forecasting record sales revenue of $588 million over the period.

Premier operates Australian retail apparel brands Just Jeans, Jay Jays, Portmans, Jacqui E, Dotti, and Peter Alexander. However, it is Smiggle--a flamboyant stationery and ancillary product brand popular with children--that has seen remarkable success in Australia, New Zealand and more recently in the UK and Asian markets, proving a champion of the stable in recent times, along with sleepwear retailer Peter Alexander.

Double-digit sales growth at Smiggle and new store openings for Peter Alexander have partially offset declining sales across the group's other brands. This contradicted projections from some quarters of a Brexit-led crash, particularly for Smiggle, which is a dominant player in the UK and Europe.

"Given the strong success of the Smiggle brand in the United Kingdom and no major competitors of note in Europe, our long-term forecasts assume Premier will expand Smiggle into continental Europe," said Sherlock.

The Peter Alexander brand has achieved "strong like-for-like sales growth in recent years" with "a pipeline of product ideas that will increase the attraction of the sleepwear range to Asian shoppers".

"We expect modest sales growth going forward, with earnings uplift from the brand mainly attributable to increasing the number of stores," Sherlock said.

While not regarded by Morningstar as having an economic moat, Premier carries an exemplary stewardship rating, with chairman Solomon Lew having a formidable and lengthy track record in the retail space.

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Glenn Freeman is Morningstar's senior editor.

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