It doesn’t matter which way you cut the numbers, the consumer discretionary sector has been a disappointing performer. According to Standard & Poor’s, the annualised price return for the past 12 months to May 31, 2011 has been a negative 7.02 per cent and, over five years, a negative 9.37 per cent. Comparatively, the consumer staples sector has posted a positive annualised price return of 6.82 per cent for the year to May 31, 2011 and 5.21 per cent over five years. For the S&P/ASX 200, the annualised price return has been a positive 6.29 per cent for the year to May 31, 2011 and a negative 1.2 per cent over five years. Higher interest rates and utility charges have cut disposable income to the detriment of discretionary retailers and shareholders. However, Steven Hing, general manager of Zodiac Securities, has hand-picked his top five stocks as considerations to buy from a consumer discretionary sector consisting of 162 companies for a market capitalisation of $109 billion.

Hing says investors need to form a view on the outlook for the Australian economy, interest rates, the Australian dollar and the consumer discretionary sector before investing – as all of these can have a hige impact on the sector. Investors who are optimistic about the future could find value here at what Hing considers discount prices for companies with solid businesses.      

The Reject Shop (TRS)
Market capitalisation: $316 million
Price/earnings ratio: 15.6 times
Share price: $11.80


Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO) 

Higher interest rates and a profit downgrade led to a share price decline. Half year NPAT (net profit after tax) of $15.9 million up to December 26, 2010 was down 16 per cent on the previous corresponding half. But Hing expects the company to bounce back and grow in line with expanding on its 200-store network. He says the resilient discount retailer is recovering from the damage caused by the Queensland floods. “Management strength lies in the ability to identify and stock high turnover products that are everyday items,” he says. “The model remains strong.”

Super Retail Group (SUL)
Market capitalisation: $906 million
Price/earnings ratio: 17.47 times
Share price: $6.90


Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO) 

Four businesses make up the group operating about 400 stores in Australia and New Zealand. Businesses include Supercheap Auto, BCF (boating, camping and fishing), Goldcross Cycles and Ray’s Outdoors. The company reported a substantial increase in first half NPAT to $24.9 million for the six months to January 1, 2011. Hing says diverse operations are a company strength, enabling multiple earnings streams.  The company is generating solid growth from its boating, camping and fishing chain, perhaps reflecting people’s willingness to spend on activities they enjoy. “This is a well run company in a difficult industry that has no real barriers to entry,” Hing says. “I consider it a suitable stock for investors comfortable with a medium level of risk in seeking both capital growth and a moderate dividend return. The share price is trading near recent highs of $7.19, defying the recent downgrade of the sector.”

JB Hi-Fi (JBH)
Market capitalisation: $1.67 billion
Price/earnings ratio: 14.14 times
Share price: $16.77


Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO) 

This company has been a solid growth story since listing in 2003. The company has expanded the number of stores across Australia and New Zealand to about 150. The company reported a 15.6 per cent increase in NPAT to $87.9 million for the half year to December 31, 2010. It’s just completed a $173 million buy-back. “The company should benefit from a strong Australian dollar,” Hing says. “The business is resilient, with demand for consumer electronics remaining high. Short-term price weakness can present an opportunity to buy well-managed companies with good long-term fundamentals. And JB Hi-Fi is one of them.”

Kathmandu (KMD)
Market capitalisation: $359 million
Price/earnings ratio: 39.36 times
Share price: $1.73


Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO) 

After opening its first store in 1987, the company now has about 100 across Australia and New Zealand, with plans for 50 more. In November 2009, the company listed on the Australian and New Zealand stock exchanges. Hing says the Kathmandu clothing and equipment brands enjoy strong recognition and credibility in its target market of healthy, energetic, adventure-focused consumers across a wide age group. He says high gross margins enable a solid return on capital. Risks include the potential for stronger competition, and volatility in demand for discretionary goods. The company reported a 28.4 per cent increase in EBIT (earnings before interest and tax) to $NZ19.9 million for the half year ending January 31, 2011. Hing says: “The strength of the brand in a relatively untapped Australian market should drive strong earnings growth over the next two years, assuming discretionary retail demand holds up. “Cooler weather and the Rugby World Cup in New Zealand later this year should lift sales.”

Specialty Fashion Group (SFH)
Market capitalisation: $183 million
Price/earnings ratio: 8.84 times
Share price: 915 cents


Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO) 

Specialises in women’s apparel with more than 850 stores across Australia. Brands include Millers, Katies, City Chic, La Senza and Autograph. Hing expects a stronger second half after reporting a disappointing first half net profit of $16.8 million to December 31, 2010. The company held $16.9 million in cash and had no debt at the end of the half year. The company considers acquiring the La Senza licence and launching City Chic’s US online business as growth opportunities. Hing says Specialty Fashion Group has the scale and reach to be a competitive force in terms of product offering and price, particularly in an improving economy. He says the company offers investors good long-term value at its closing price of 91 cents on June 1, 2011.

Market capitalisation and price/earnings ratios taken at May 31, 2011
Share prices taken at June 3, 2011 close.

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