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The consumer sector consists of more than 200 ASX listed companies that distinguishes them by their offerings. Food and beverage producers and distributors are widely referred to as consumer staples, while general retailers are considered consumer discretionary stocks.

Consumer staples are said to be defensive because their earnings tend to hold up much better in challenging times – shoppers still have to buy life’s necessities. In contrast, the earnings of discretionary retailers can suffer in response to higher interest rates, general price rises and soaring utility charges.

The Australian Bureau of Statistics reveal seasonally adjusted retail turnover rose of 0.4 per cent in January 2011 to $20.4 billion. Food retailing rose 2.5 per cent, other retailing was up 2.1 per cent and department stores increased 2.3 per cent. Turnover in household goods retailing fell 4.6 per cent; clothing, footwear and personal accessory retailing was down 2.5 per cent; and cafes, restaurants and takeaway food services retreated 0.3 per cent. The discretionary Australian retailer also has formidable competition from overseas shops, courtesy of a strong Australian dollar, via the Internet.

Steven Hing, Novus Capital executive director of equities, examines the consumer sector. “Retail is broad, consisting of mainly supermarkets, department stores, clothing outlets and general retail,” he says. “You need to assess each separately to make investment decisions.”

Wesfarmers (WES)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO) 

Woolworths (WOW)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO) 

Wesfarmers (WES), via owning Coles Group, and Woolworths (WOW) dominate the supermarket space. But what also appeals to Hing is each company has diverse and multiple earnings streams. Wesfarmers operates Bunnings, Target, Kmart and Officeworks in the retail space. “This industrial conglomerate also has insurance, agriculture and coal and can be a strong performer in any portfolio,” Hing says. Wesfarmers reported a NPAT (net profit after tax) of $1.173 billion for the half year to December 31, 2010, a 33 per cent rise on the previous corresponding period. Diversified Woolworths also owns the Big W brand, Dan Murphy’s liquor outlets, the Dick Smith and Tandy electronics chains and hotels. The company posted a 6 per cent rise in first half 2011 NPAT to $1.16 billion on revenues of $28.3 billion. Hing says the Woolworths share price is at the lower end of this year’s trading range and the company remains a portfolio staple. “Wesfarmers and Woolworths have also infiltrated the fuel markets through Shell and Caltex respectively,” he says. “There will also be big interest in the hardware space, as Woolworths competes with the Wesfarmers-owned Bunnings.”

Metcash (MTS)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO) 

Although a junior compared to Coles and Woolworths in the retail space, Metcash reported a 5.8 per cent rise in wholesale sales to $5.939 billion for the half ending October 31, 2010. A reported profit after tax was up 0.9 per cent to $110.2 million. But Hing says there’s also another matter of interest. “While Metcash is still trying to compete with the majors across its IGA, Australian Liquor Marketers and Mitre 10 brands, the real growth for the company will come if it can overcome the ACCC’s (Australian Competition & Consumer Commission) opposition to its proposed acquisition of the Franklins chain of supermarkets,” he says. “Metcash at today’s price represents good value if it can make inroads into the market shares of larger players.”


Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO) 

Electronics giant JB Hi-Fi (JBH) is one consumer discretionary stock that continues to perform well despite higher interest rates and increasing cost of living charges. The company’s business model has proven to be sound, with JB Hi-Fi booking a first half 2011 NPAT rise of 15.6 per cent to $87.9 million. Sales of $1.68 billion were up 8.3 per cent on the previous corresponding period. As JB Hi-fi’s share price is off its 12-month high of $22.46, Hing says investors may find good value below $20. The company closed at $18.45 on March 8, 2011.

The Reject Shop’s (TRS)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO) 

While The Reject Shop’s (TRS) sales grew 10 per cent to $275.9 million in the 2011 first half, NPAT fell 16 per cent to $15.9 million. Hing says the company’s share price was punished in response to a forecast profit downgrade in late November. Also, the Queensland floods are having an adverse impact at its Ipswich distribution centre. “However, the impact may be short term, and this may present an opportunity to pick up the stock cheaply,” he says. “It remains weak at $12 levels, but this retailer may be a potential turnaround story.” On March 8, 2011, The Reject Shop closed at $12.22.

Wesfarmers (WES) $32.93
Woolworths (WOW) $27.11
Metcash (MTS) $4.02
JB Hi-Fi (JBH) $18.45
The Reject Shop (TRS) $12.22

Price current to market close, March 8, 2011

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