As the Christmas decorations start to appear and the advertising blitzes mount in volume, investors turn their attention to the nation’s retailers. With record-low interest rates, healthy consumer confidence underpinned by a still-strong housing market,the unemployment rate at a three-and-a-half year low, full-time job numbers rising and signs that petrol – the single biggest weekly purchase for most families – is set to slide in price for summer through the combination of the appreciating A$ and a weakening Singapore gasoline price, Australians certainly appear to have the capacity to set the tills ringing this Christmas.
According to the Australian Bureau of Statistics (ABS), retail spending is on the rise: it was up by 0.6% in September, after rising by 0.5% in August, taking the annual increase in retail trade to 3.3% over the year – a 4-month high. Non-food retailing is doing even better: it has risen by 1.5% in the past two month – the strongest two-month result for 20 months – and spending is up 3.6% on a year ago.
An alternative view of spending, the Commonwealth Bank Business Sales Indicator (BSI) – a measure of economy-wide spending – shows that spending is building momentum in the lead-up to Christmas. The Commonwealth Bank BSI tracks the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities: it covers spending broadly across the economy rather than just retail sales, including spending on automobiles, personal services and airlines. CommSec says the BSI lifted by 0.4% in October, matching the gain in September, representing the biggest back-to-back increase in spending in nine months.
Numbers like these are music to the ears of the nation’s retailers, many of which rely heavily on a strong Christmas season.
In terms of potential share price gains, stock market analysts are surprisingly bullish on the retailers. In some cases, this is because they expect ravaged share prices to show some recovery; in others, that’s on the back of continued incremental improvement.
Here’s a snapshot of where some of the market’s big retail names are positioned, in the lead-up to the hoped-for Christmas rush.
Myer (MYR, $1.19)
Analysts’ consensus target price: $1.36
Implied upside: 14.3%
FY17 forecast yield: 4.6% fully franked
Iconic retailer Myer has had a difficult seven years on the stock market: the shares fell 8% on their first day of trading in 2009 and have subsequently never traded anywhere near their $4.10 issue price. Myer currently holds the dubious honour of being the most short-sold stock on the Australian Securities ÂExchange (ASX), with just under 20% of its issued capital sold-short.
But although float subscribers have taken a bath on the stock, Myer is definitely being turned around in a $600 million reinvestment program overseen by a new management team led by Richard Umbers, who has been in the chief executive officer’s job for a year. On Friday, Myer reported its fifth consecutive quarter of positive same-store sales growth, and beat its archrival David Jones on sales growth for the first time in two years.
Myer’s same-store sales for the latest quarter (the first of the financial year) rose 1.6%, with total first-quarter sales up 0.6% to $719.2 million. The shares surged 10% higher, to $1.19, and on analysts’ consensus price target, there is further scope to rise, with a 4.6% fully franked expected yield along the way.
JB Hi-Fi (JBH $25.90)
Analysts’ consensus target price:$29.67
Implied upside: 14.6%
Forecast FY17 yield: 4.2% fully franked
JB Hi-Fi is coming off a record year in FY16, in which it grew total sales by 8.3% and same-store sales by 5.4%. Net profit rose 11.5% to $152.2 million, while the full-year dividend was lifted by 10 cents a share to $1. In September JB Hi-Fi bought the 101-store The Good Guys chain in for $870 million, which strengthens JB Hi-Fi’s presence in the home appliances market.
Sales for the first quarter of FY17 were in line with expectations and the company has reaffirmed its sales guidance, which is looking for a sales boost of about 7.6%, excluding The Good Guys. Analysts expect earnings per share (EPS) growth of 10.6% and a dividend boost of 11% in FY 17, and also see healthy share price growth.
Harvey Norman (HVN, $4.55)
Analysts’ consensus target price:$5.19
Implied upside: 14%
Forecast FY17 yield: 6.7%, fully franked
Instead of getting sucked in to an ugly argument with short sellers this month, Gerry Harvey should have been talking more about the same-store sales growth of 5.4% his Australian franchisees reported in the first quarter, whichshows that favourable trading conditions have continued into the new financial year for Harvey Norman. Aggregated sales grew 6.6%, to $1.7 billion, and the market is looking for a solid Christmas season. Analysts see room for the share price to grow further, and in the meantime the stock is one of the higher yields on the market.
Premier Investments (PMV, $13.25)
Analysts’ consensus target price:$15.06
Implied upside: 13.7%
Forecast FY17 yield: 4%, fully franked
PMV operates in Australia, New Zealand, United Kingdom and Singapore, through the fashion brands Just Jeans, Jay Jays, Dotti, Portmans, Jacqui E, Peter Alexander and stationery brand Smiggle,with more than 1,000 stores throughout these four countries. Premier had a strong FY16, with retail sales up 10.9%, passing $1 billion for the first time, and underlying earnings up 28%. Smiggle continues to be the star performer, racking up impressive sales growth of 41.8%: the brand is spearheading the company’s international expansion, with Premier rolling Smiggle out in the UK, Hong Kong and Malaysia. The company is also investing heavily in sleepwear brand Peter Alexander. Analysts expect earnings per share (EPS) growth of 10.3% and a dividend boost of 11% in FY 17, and see scope for the share price to push above $15.
The Reject Shop (TRS, $7.80)
Analysts’ consensus target price:$11.57
Implied upside: 48.3%
Forecast FY17 yield: 6%, fully franked
Discount variety retailer The Reject Shop has more than 400 stores around Australia, selling low-cost everyday needs including homewares, kitchenware, hardware, pet care, household cleaning products, toiletries and cosmetics. FY16 saw sales growth of 5.7% and net profit growth of 20%, and analyst expect TRS to crank the earnings growth up to 26.5% in FY17, enough to boost the dividend by 6.8%. The Reject Shop’s shares have been pounded since August, losing more than half their value on what was considered a weak second half of FY16 and a similarly tepid first-quarter update, and the fact that German supermarket operator Aldi is biting into The Reject Shop’s territory. But on analysts’ consensus price target, that fall has brought TRS into significant value territory, and there is a projected 6% yield to back that up.
Super Retail Group (SUL $8.83)
Analysts’ consensus target price:$10.86
Implied upside: 23%
Forecast FY17 yield: 5.3% fully franked
The owner of the Rebel Sport, Super Amart, BCF, Rays Outdoors and Super Cheap Auto brands usually has a strong Christmas and summer period, but is being hurt by the clearance activity at Masters in the short term. Offsetting that are strong performances in sports and car parts. Margins across the group are strong – expected at about 11.5% in FY17 at EBIT (earnings before interest and tax) level and the market expects a strong rebound in earnings this year, after EPS slipped by 23% in FY16. There is a healthy yield projected on SUL and attractive upside on analysts’ consensus price target.
Kogan.com (KGN, $1.48)
Analysts’ consensus target price:$2.24 (Thomson Reuters)
Implied upside: 51.3%
No dividend expected
The recently listed (July 2016) Kogan.com is Australia’s leading pure play online retail website: it is the third most visited shopping website in Australia, behind eBay and Amazon. The company delivered a strong FY16 result, with revenue beating prospectus forecasts by 5% and the net profit of $800,000 doubling the prospectus forecast. In March Kogan.com bought the Dick Smith online retail business, which added 1.3 million active subscribers (people who had bought in the last 12 months) to Kogan.com, bringing active subscribers to 3.7 million – one in six Australians. At its annual general meeting this month, Kogan.comsaid that based on strong performance, it would upgrade its guidance for FY17 over and above the prospectus forecasts: the company is now forecasting earnings before interest, tax, depreciation and amortisation of between $8 million and $9 million for FY17. Although Kogan.com is not a dividend payer, analysts expect big things in terms of share price growth.
Shaver Shop (SSG, $1.00)
Analysts’ consensus target price:$1.45
Implied upside: 45%
FY17 forecast yield: 4.0% unfranked
Also a July 2016 listing, specialist shaving and personal grooming retailer Shaver Shop is trading under its issue price of $1.05, but the company beat prospectus forecasts for sales and earnings in FY16, and analysts expect 25% earnings growth in FY17 and the commencement of dividends. From 100 stores when floated, Shaver Shop has a target of 145 stores across Australia-New Zealand within three years. Shaver Shop also runs the websites www.shavershop.com.au and www.shavershop.net.nz, and an eBay store: online sales grew by more than 42% in FY16. Shaver Shop is a highly impressive specialist retailer, and analysts expect its share price to move higher.
RCG Corporation (RCG, $1.44)
Analysts’ consensus target price:$1.78
Implied upside: 23.6%
Forecast FY17 yield: 4.7%, fully franked
Footwear specialist RCG Corporation is another highly skilled operator in its field. RCG owns The Athlete’s Foot store chain, as well as being the exclusive distributor in Australia and New Zealand of brands such as Merrell, Skechers, Saucony, CAT (Caterpillar), Vans, Dr. Martens, Timberland and Sperry.RCG is another retail stock to have attracted the attention of short sellers, especially after a perceived disappointing third-quarter result from Skechers in October, which showed a 3.4% drop in its US wholesale business, with the softening trend seen as likely to affect Australia: RCG’s distribution agreement with Skechers expires at the end of 2026, and it plans to have between 120 and 140 Skechers stores by around 2020, up from 47 at June this year. Skechers’ US downturn dented the RCG share price, but brought it back to much more attractive value: analysts are looking for 33% growth in earnings in FY17 and a 22% lift in the fully franked dividend.
Kathmandu Holdings (KMD, $1.71)
Analysts’ consensus target price: $1.98
Implied upside: 15.8%
FY17 forecast yield: 6.4% (reports in NZ$), 61.8% franked
New Zealand-based adventure and outdoorsapparel company Kathmandu is another retailer that is digging itself out of an earnings and share price slump under a new chief executive, and Xavier Simonet is delivering. Revenue in FY16 rose 4%, to NZ$425.6 million, but net profit surged 64% to NZ$33.5 million. The final dividend was boosted by 37.5%. This month the company said that total sales for the first 15 weeks to November 13 rose 2.8%, with same-store sales in the crucial Australian market up by 3.4%. Kathmandu will depend heavily on a healthy Christmas sales period. The stock has had a good 12 months (up 27%) and analysts’ consensus reckons there is more appreciation to come.
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