In retail, the winning combination is increasing comparable sales together with the opening of new stores. This combination increases total sales and the valuation of the stock. This is more typical of a newer business that’s growing strongly than a mature business that has saturated its market. When it comes to a mature business with little growth prospects, the strategic options can be risky and usually involve a move offshore to find growth. This has been a hit or miss for Australian companies. Companies such as Domino’s Pizza Enterprises Ltd (DMP), Premier Investments Limited and (PMV) have done it well. Companies such as Wesfarmers Ltd (WES)/Bunnings have seen failure when it comes to overseas expansion.
One stock that’s on a win
The move for shoppers away from bricks and mortar retailers to online platforms has introduced competitive pressures, margin compression and the need to innovate and adjust. This means that shopping centres have tried to evolve utilising the smaller footprint that many retailers are now moving towards.
Data analytics means that even smaller retailers are now competing against giants like Amazon and its ability to use large amounts of data, automation and innovate quickly. This innovation is impacting not only retail, sales and marketing but also vertical aligned spaces like freight.
One stock benefitting from the structural moves in the retail sector is Temple & Webster (TPW). It is Australia’s largest online only furniture and homewares retailer. The stock is up 142% in the past 52 weeks. It is a retailer where revenue growth is accelerating despite cyclical headwinds.
Cyclical factors: consumer confidence & the wealth effect
Interest rates are an indicator that can be used to define cyclical cycles. As the bias tends towards weaker interest rates, it usually means that consumer spending and the economy is weak. This is a difficult environment for retailers compared to a strong economy, where consumers feel confident and the economy is doing well.
Some of this is due to the wealth effect. When house prices are rising, people have jobs, they tend to feel confident about their futures which translates to a good environment generally for retailers. When house prices are falling, the jobs market is tough, then people tend to feel nervous about the future and this usually translates into less spending especially on non-essential items such as clothing, electronics, jewellery etc.
At the moment, it’s a tough environment for retailers
Retailers doing it tough
At the moment, these include: Kathmandu Holdings Ltd (KMD) and Michael Hill International Ltd (MHJ).
Retailers doing well
These include: Accent Group Ltd (AX1), Premier Investments Ltd (PMV) and Webjet (WEB).
My retail pick: Lovisa (LOV)
This is a fast-fashion, cheap jewellery store. It develops, sources and merchandises its products in a vertically integrated model. The company recently announced a full roll out into the USA and France. This is after pilot testing in these markets over the last few years. As more stores are added, Lovisa should see the benefits of scale, as well as seeing the increasing sales impacting positively on its valuation.
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