It feels odd writing a bullish story about retailing, from Victoria. The state’s latest lockdown is yet another retail blow as shops shut and consumers cocoon at home.
I feel for restaurants that lost thousands over the Valentine’s Day weekend; florists that missed a key trading day; and the regional tennis club that had to cancel a key tournament.
The share market is less concerned. Key retail stocks have been on a tear over six months, helped by surging online sales. JB Hi-Fi’s (JBH) profit result this week starred.
JBH was the first stock I wrote positively about for this Report, at the pandemic’s peak in March 2020 [1]. JBH has soared from $31.88 then to $51.10 and has much growth ahead, albeit with slower price gains from here.
Other key retail ideas in this column include Collins Food, Domino’s Pizza Enterprises, Super Retail Group, Kogan.com, Nick Scali, Adairs and Beacon Lighting Group. A few months ago, I became bullish on Motorcycle Holdings and Autosports Group in automotive retailing.
It hasn’t all gone to plan. My contrarian view on retail property was too early. Scentre Group and Vicinity Centres have treaded water in 2021, despite better-than-expected retail sales. I still like Scentre Group’s long-term prospects due to the latent value in its “fortress malls”.
Another preferred trust, Charter Hall Retail REIT, is up a little since I wrote about it in June 2020, at $3.60 a unit (it is now $3.78).
So, is it too late to buy retail stocks after soaring gains in the past six months?
The easy answer is: Yes. Nobody could blame shareholders in JB Hi-Fi or other high-flying retailers for taking some profits. Many retailers look fully valued, for now.
But it’s too simplistic to say the sector has had its run and is best avoided. There’s a lot of growth ahead for quality retailers in the next few years. Some will enjoy boom-like conditions and others will scramble to keep up with demand.
Not for a minute am I downplaying near-term challenges in retail. Sadly, the end of the JobKeeper program and JobSeeker supplement in March will hurt many consumers and retailers, even though its effect should be reasonably short-lived.
COVID is another persistent threat. Look at the damage from Victoria’s snap five-day lockdown. This year’s vaccine rollout will inject confidence, but is no panacea for retailers. A recovery could take years for retailers that rely heavily on CBD traffic or international visitors.
Risks aside, there are four big drivers for retail over the next two years. First, the Australian economy is recovering faster than expected. The Commonwealth Bank this week forecast the economy to grow 4.2% in 2021 and unemployment to fall to 5.7% by year-end.
Second, rising house and share prices will make consumers feel wealthier and more inclined to spend. CBA tips house prices to rise 16% (cumulatively) over two years. I expect Australian shares to do even better. The result: rising consumer confidence and retail sales growth.
The savings stockpile is the third factor. Australians have around $200 billion in savings, thanks to the government’s massive wealth transfer during the pandemic. Many households will draw on this buffer as JobKeeper ends; others will have surplus capital to spend.
International border restrictions are the fourth factor. With overseas travel unlikely this year, and possibly well into next year, some consumers will spend more domestically. That $10,000 earmarked for an overseas holiday will find its way into a new couch or minor home renovation.
The challenge, of course, is finding value in the retail sector after recent gains. Here are three micro-cap retailers that appeal at current prices. Each suits experienced investors who understand the features, benefits and risks of investing in this part of the market.
1. Beacon Lighting Group (BLX)
I last wrote about the homewares retailer for this report in January 2020 at $1.10 a share. Beacon is now $1.80.
The logic was straightforward: low interest rates would encourage more homeowners to invest in their property. Beacon, a provider of overhead lighting and lamps, looked oversold.
I wrote back then: “… the market is overlooking Beacon’s operational progress, as often happens with micro-cap companies that disappoint with profit downgrades. Few broking firms cover Beacon and it seems to have lost market profile in the past few years”.
Beacon tumbled when COVID struck, but recovered strongly in the second half of 2020. However, over five years, Beacon has barely delivered a positive annual total shareholder return (3.9%, according to Morningstar). The stock has much catching up to do.
The market expects a good result when Beacon reports on Thursday this week. The company had strong trading updates in October and December, noting that its lighting and fan categories had “terrific momentum”. I expect Beacon to reinforce that view at its profit result and point to solid expected growth over the next 12 months.
CBA this week said household data points to higher spending on home furnishings. Beacon has the added benefit of more people working from home, and spending on new overhead lights, lamps and fans for their office.
It wouldn’t surprise if investors took some profits on Beacon’s result this week. Whatever happens, the market will pay more attention to a micro-cap retailer that was forgotten for a few years, even though it has an excellent brand in its category and a strong store network.
Chart 1: Beacon Lighting Group
Source: ASX
2. Cettire (CTT)
The online luxury-goods retailer listed on ASX in December after seeking $65 million at 50 cents a share. Cettire has had a good start as a listed company, its shares hitting 86 cents this week.
Cettire sells more than 160,000 luxury goods through its website. Think apparel, shoes and bags from Gucci, Prada, Burberry, Versace and other prominent brands. Cettire says it has one of the world’s largest ranges of luxury goods with 1,300 brands on its platform.
The business has grown strongly since its 2017 launch. In October 2020, Cettire achieved annualised monthly gross revenue of approximately $110 million – up more than fivefold on the same period a year earlier. The company forecasts a $1.85 million loss in FY21.
Cettire is targeting a big market. Personal luxury-goods sales are forecast to grow 3-5% annually to 2025, creating a global market worth up to $615 billion, according to Bain & Co. The rise of Chinese buyers of luxury goods is a key growth driver.
As in other markets, COVID-19 has quickened e-commerce penetration in luxury goods. Online sales of luxury goods (as a proportion of total sales) were 22% in 2019, from 12% a year earlier.
I doubt luxury goods will ever have the same online penetration as other retail categories. Many people like the instore experience of buying luxury goods. They prefer to try these goods on before purchasing, given their higher price.
However, young consumers who crave luxury brands – and are more familiar with online retail platforms – might be more willing to buy online, if it means a lower price than the instore version.
Cettire is not cheap. Assuming annualised revenue of at least $110 million, the business trades on a sales multiple of about 3 times. Kogan.com is on a trailing price-to-sales multiple of 3.22 times, versus its sector average of 1.2 times, Morningstar data shows.
Cettire has impressed since launch. From $545,000 of revenue in FY18, the business now brings in over $110 million annually. Clearly, consumers like its platform and offering.
Longer term, the business is building a barrier to entry through its brand relationships. Sourcing 1,300 luxury brands (and counting) for a website – particularly brands as prestigious as Gucci and Versace – is hard work. Cettire has a global model that can amplify growth.
That said, I’m always wary of investing in recently listed companies until they get more history as listed entities and hype subsides. Also, Cettire has much work ahead to build brand awareness and get more consumers using its site.
The stock is probably due for a price pullback or pause after it strong gains since listing. But there’s a lot to like about Cettire’s emerging position in online luxury-goods retailing.
Chart 2: Cettire
Source: ASX
3. Hipages Group Holdings (HPG)
I covered the online media platform for this report in December 2020, at $2.13 a share [2]. Hipages, now $2.35, is still miles behind its 52-week high of $2.85.
To recap, Hipages listed on ASX in November 2020 through an IPO at $2.45 a share. The News Corp-backed company connects tradies and consumers through its website.
I wrote in December that Hipages will benefit from rising demand for home repairs and renovations in the next 12 months, as house prices recover and more homeowners plough part of savings accrued during COVID into their dwelling.
Also, that COVID would quicken digitisation of trade services. Arranging tradies quotes and services via online platforms is a lot more efficient than calling them directly. Recently, I called a few tradies to quote on rebuilding a fence, with little success. Next time, I’ll use Hipages.
My thesis on Hipages has strengthened since that December story. The house-price recovery, stronger than most expected, will fuel demand for renovations and home improvements. That means more work for tradies and presumably higher demand for Hipages’ platform.
I’ll be watching Hipages’ half-year result on February 23 with interest.
Chart 3: Hipages Group Holdings
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 16 February 2021.