Key points
- JB Hi-Fi reported one of the better results for 2014-15, buoyed by strong sales in home computers, appliances and new phone and software releases.
- Retail Food’s international earnings were $15.1 million in 2014-15, from $2.1 million a year earlier. It is building a significant global footprint with 81 international outlets opened last year.
- In its half-year result in February, Premier Investments said 15 of its top 20 Smiggle stores were in the United Kingdom and it wants 200 Smiggle UK stores and $200 million in sales over the next five years.
There are many reasons not to buy retail stocks: consumer confidence is falling, the economy is slowing, and a lower Australian dollar hurts some import-sensitive retailers. Anaemic wages growth and the “income recession” are other obstacles.
But there have been some surprisingly good performances from retailers. Some, such as Harvey Norman Holdings, are now fully reflected in the share price. Others, including JB Hi-Fi and Nick Scali, look better value after the market correction.
I favour two retail strategies in this market: companies exposed to domestic housing; and those growing strongly overseas.
Strategy 1) Domestic retailers exposed to housing
Momentum in new and established housing markets should be maintained as interest rates remain at record lows or are cut again in November. The renovation market should also benefit as high property prices encourage people to upgrade rather than move.
Good earnings results from JB Hi-Fi and Harvey Norman reinforce the concentration of retail growth: the “haves” exposed to an elevated housing cycle and government tax incentives on deprecation for small business; and the “have nots” exposed to discretionary retail spending in categories such as fashion and consumer staples.
JB Hi-Fi (JBH) reported one of the better results for 2014-15, buoyed by strong sales in home computers, appliances and new phone and software releases. Its guidance for 2015-16 topped market expectations. But it has fallen from a 52-week high of $22.37 to $18.72 in line with the broader market sell-off.
Six of 16 analysts who research JB Hi-Fi rate it a buy, eight rate it a hold, and two rate it a sell.. The median price target is $21.26. The market is too bearish and further price weakness in a volatile market could offer a long-term buying opportunity.
Trading conditions for JB Hi-Fi will be tougher in this financial year.
Government tax changes on small business depreciation encouraged some businesses to bring purchases forward. But JB Hi-Fi can continue to grow strongly through store rollouts and I rate its strategy to build a bigger presence in the well-performing small-appliance category highly.
[1]Source: Yahoo!7 Finance
Nick Scali (NCK) is another standout. The small-cap furniture retailer reported a strong full-year result. Sales rose 10% to $155.7 million for 2014-15 and after-tax net profit leapt 20% to $17.1 million.
Nick Scali is strongly exposed to housing and is among the market’s best well-run small caps. The falling Australian dollar lifts import costs and weighs on its profit margins, but it is navigating the currency’s decline.
It consistently delivers a high return on equity, has low debt and minimal share issuance. Store openings in late 2014-15 will have greater effect in this year’s results and faster growth in Western Australian should lift revenue.
Nick Scali looked overbought at $3.79 in May. It appeals at $3.59, but would look more interesting closer to $3.20. It has bounced from that level twice in the past three months, suggesting price support.
[2]Source: Yahoo!7 Finance
Strategy 2) Born-global retailers
Constant retail doom and gloom has overshadowed the offshore progress of a handful of retailers. Domino’s Pizza Enterprise’s growth in Europe and Japan is a standout, but the pizza franchisor appears fully valued.
Another franchisor, Retail Food Group (RFG), offers better value. It owns the Donut King, Brumby’s Bakery, Michel’s Patisserie, bb’s café, Esquires, The Coffee Guy, Pizza Capers Gourmet Kitchen and Crust Gourmet Pizza, and last year bought the Gloria Jean’s and Di Bella Coffee chains.
Retail Food’s international earnings were $15.1 million in 2014-15, from $2.1 million a year earlier. It is building a significant global footprint with 81 international outlets opened last year.
Retail Food Group has fallen from a 52-week high of $8.81 to $4.42. The market darling was ripe for profit taking after soaring gains in 2014. Also, restructuring charges and write-downs of underperforming franchise systems weighed on its result.
But it did not warrant a share-price halving from its high. Retail Food delivered 50% growth in underlying earnings (EBITDA) to $88.8 million for 2014-15.
Three of the five analysts who cover the stock have a buy or strong buy recommendation. The median share-price target of $6.50 suggests decent upside from the current price.
[3]Source: Yahoo!7 Finance
Premier Investments (PMV) is the pick of the globally focused fashion retailers. It owns the Just Jeans, Jay Jays, Portman, Jacquie E, Dotti, Peter Alexander and Smiggle brands. The latter two, particularly Smiggle, are the big growth engines and should contribute more than half of Premier’s 2014-15 earnings.
Stationery chain Smiggle is booming overseas. In its half-year result in February, Premier said 15 of its top 20 Smiggle stores were in the United Kingdom and it wants 200 Smiggle UK stores and $200 million in sales over the next five years. Investment bank UBS this year hypothesised that Premier could have 450 Smiggle stores worldwide by 2024-25.
Premier has fallen from a 52-week high of $14.62 to $12.55. The market has mixed views: four of 13 analysts have a buy recommendation, four a hold and five a sell. The median price target of $12.20 suggests Premier is fairly valued.
But it deserves a spot on portfolio watchlists in anticipation of improving value during this market correction. It is among the better-quality mid-cap stocks and has stronger global prospects than most Australian retailers. Smiggle could outperform market expectation.
[4]
Source: Yahoo!7 Finance
Lovisa Holdings (LOV) is also growing offshore. The fast-fashion jewellery retailer listed on ASX in November 2014 through a $102 million float at $2 a share. It peaked at $3.78 this year and now trades at $3.28.
Lovisa, with 239 stores, is slightly ahead of prospectus forecasts. Eighty offshore stores, mostly in New Zealand, Malaysia, Singapore, South Africa and the Arabian Gulf, are preforming well. Eleven of its 20 top-performing stores are overseas.
It bought 21 fashion-accessories stores in South Africa in March for $2 million, becoming that country’s largest fashion-accessories retailer.
Lovisa reported 27% growth in revenue to $134.3 million for 2014-15. Adjusted earnings before interest and tax were $24.8 million – about 5% ahead of prospectus forecasts and in line with market expectations.
The fast-fashion accessories category has good growth prospects as low-price jewellery encourages adolescent customers to make more store visits and purchases, and reduces the risk of obsolete stock.
Lovisa will be re-rated if it successfully enters the Northern Hemisphere sooner than the market expects. The prospectus said this was a three to five year goal, but the guidance in the latest result said Lovisa was conducting due diligence on that market.
Four of five analysts who cover Lovisa have a buy recommendation and one a hold, consensus forecasts show. The median price target of $3.70 suggests it is undervalued from the current price. It would look more interesting closer to $3.
As a newly listed small-cap company, Lovisa suits experienced investors comfortable with higher risk.
[5]Source: Yahoo!7 Finance
– Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at September 9, 2015.
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