In most economic downturns investors can find some safety in “hot” sectors defying the market gloom.  Others rely on picking best of breed stocks beaten down by market conditions, regardless of sector.  While most healthcare stocks and telecommunications stocks have outperformed of late, the dog of all dogs in the ASX in the eyes of many is retail.  As evidence, five of the top ten most shorted stocks on the ASX are retailers with JB HiFi hanging on to the honor of being the top target of shorts for well over a year.

It is easy to make the case that retailers as a whole are flea-bitten to a degree that may take years to clean up.  The argument begins with where Australians have been getting the income needed for healthy growth in retail activity across the board.

While we pride ourselves in having the world’s most stable advanced economy, looking into some statistics points to the possibility we are not all that much different than our beleaguered friends in the United States in some ways.  Here is how their story goes.

It is the middle class that drives retail sales, and in the United States, middle class wages have been declining for decades.  Rather than reduce spending to reflect this new reality, the housing boom allowed US consumers to use the rapidly increasing equity in their homes as ATM machines.  In addition, credit cards were plentiful and banks competed with each other aggressively with teaser rates designed to make taking on more debt attractive and seemingly affordable.  Then the bubble burst leaving behind the core argument against the future of retail as an attractive investing opportunity.

With lower wages and less access to debt, where is the money going to come from to buy?

Ah but Australia is different you say.  She’ll be right, mate, right?  Well, maybe not.  First, the following chart from an Australian Government Economic Outlook white paper shows wage growth in Australia from 2001 to 2011:

As you can see, in the public sector the wage rate is roughly the same as it was 10 years ago and the gains in the private sector are less than 1%.  Our unemployment picture has been better but expectations as of now are for an unemployment rate above estimates coming in at 5.2%.

As all this was happening we here in Australia began to outpace our Canadian counterparts and even those profligate Americans by a substantial margin in running up household debt.  Here is a household debt to household disposable income graph produced by the Reserve Bank of New Zealand and the Reserve Bank of Australia:

Beginning in 2010. Aussie’s got the memo and began reducing household debt. Furthermore, savings rates are on the rise which means we’re beginning to pay down debt and increase savings, inevitably leading to less disposable income for consumer discretionary items and higher end consumer staples.

The final nail in the Bear argument for the outlook with our retail sector is consumer confidence.  International Market Research firm Roy Morgan publishes a Consumer Confidence Rating weekly and here is their latest:

You may have read opinions highlighting the rise in consumer confidence as a potential turning point but as you know a few positive readings do not always lead to a true trend reversal.  Given the sharp declines in consumer confidence, the wage stagnation, the deleveraging of Australian households, and the host of macroeconomic nightmares, it would be hard to imagine a bull case for retail.

Yet the glimmers of one could be appearing.  The recent cut in the cash rate may be the cause of a little upward flurry in retail sales.  Bulls are sheepishly emerging from the shadows to point out Australian retail sales climbed 0.5% in May, above the expected 0.2%, and following a 0.1% increase in April.  In fact, retail sales have been positive in every month so far in 2012.

Although far from explosive growth, these numbers are hopeful signs for those who think sectors first and individual stocks second.  However, there have been retailers who actually did well in the midst of all this because not all retailers are created equal.  This observation appears to be little more than common sense, but in the midst of bleak market conditions and a bleak outlook for the retail sector as a whole, many don’t even bother to look for value in retail.

The following graph drives home the point:

You can see a disappointing 7% and 8% growth in most retail outlets over the last ten years, but who are the “rest of retailers” up 85%?  Well, here are two of them.



Market Cap

Share Price

52 Wk Hi

52 Wk Lo




Op Margin

Super Retail Group










ARB Corporation











Note in both cases current share price is substantially up from the 52 Week Low.  Both have respectable Price to Earnings Ratios and a very attractive P/EG for Super Retail (SUL).  Super Retail Group’s 2 year growth forecast is for a 31% increase in earnings and a 23.5% increase in dividends. 

Both these companies are in the auto parts and accessories business but Super Retail Group Limited (SUL) is the more diversified of the two with a separate Leisure Retailing business segment.  ARB Corporation (ARP) is vertically integrated with internal capability to design, manufacture, distribute, and sell their line of motor vehicle accessories and light metal engineering works.  They have operations in the United States and Thailand and have managed to thrive despite the strength of the Australian dollar.

The retail sales volume from the Australian Bureau of Statistics (ABS) above shows it was around 2009 when sales began to stagnate and decline in department stores and clothing, footwear, and accessories retailers.  Let’s see how ARB”s share price has fared over the last five years.  Hear is their chart:

One could make the case that in tough times consumers opt to repair their existing vehicles rather than purchase new ones.  In that sense automotive parts become consumer staples rather than consumer discretionary items.  While that explanation works for ARB, it doesn’t hold water for SUL.  They sell bicycles and accessories and all forms of outdoor equipment and clothing from camping gear to boating and fishing.  Here is their five year performance chart:

Despite a very difficult environment, ARP’s share price is up more than 100% over the last five years while SUL’s rose about 80%.  As you know, share price does not always reflect underlying fundamental performance.  What can the fundamentals tell us about future prospects?  Is it too late to invest in ARP and SUL or do both have room to grow?

While growth investors are focused almost exclusively on future growth, value investors look to performance history as a barometer for the future.  The idea is simple.  Companies that have shown solid earnings and profit growth over the last five or more years; are likely to continue that performance. 

The last five years have been challenging to say the least.  Let’s look at how these two companies have fared in terms of yearly Earnings per Share (EPS) and Net Profit after Tax (NPAT).  Here is the table:

Company Code 2007 EPS – (NPAT) 2008 EPS – (NPAT) 2009 EPS – (NPAT) 2010 EPS – (NPAT) 2011 EPS – (NPAT)
Super Retail Group SUL  $0.19
 ARB Corporation  ARP  $0.24


In the best of times, it can be challenging for some companies to grow earnings and profits year over year.  These two hidden gems did it in a time when many of us were crying about the sorry state of Aussie retailers as a group.  Those who recognised there can be stars in a group of also-rans and were buying instead of crying have been rewarded. 

Look back at the price charts for both and you can see there were ample opportunities to jump on board.  Yet many investors didn’t see the opportunity because they weren’t looking for it.  SUL has already reported NPAT up 40.3% for Half Year results released in February so it is reasonable to expect good things from them when they report full year results in the next month or so. 

These two companies stand above the retailing crowd and for many of Australia’s notable retailers, things are bleak at best.  As you know, beaten down companies can represent buying opportunities but they can also be classic value traps.  The investing world is littered with the corpses of retail investors who were certain a stock just couldn’t go any lower, only to see that the stock could and did.  Here then are five retailers for your consideration:



Mrkt Cp

Share Price

52 Wk Hi

52 WK Lo

Dividend Yield


Op Margin


Metcash Ltd










Myer Hldngs










Premier Invst










Billabong Intl










Oroton Group











With the highest ROE and operating margin of any retailer on the table, one might expect Oroton Group Limited (ORL) to have better share price performance.  The company is Australia-based and retails and wholesales high end leather goods and assorted accessories and fashion apparel.  They have strong brand identification with their own OROTON brand as well as the POLO RALPH LAUREN label.  They have more than 80 stores across Australia and their own online shopping site.  Here is their share price performance year over year:

While they are down about 7% so far, on a 5 year basis the company has gained over 100% and over two years they showed a gain of about 7%.  While their dividend yield is lower than the others, it is also safer as the company’s cash position is solid.  They have plans to expand their footprint in Asia.  Although they have an online presence, they are at risk of margin compression from online competition.  The key to the future of ORL is the same as for most of the retailers on our table – online sales.

For whatever reason, Australian retailers have arrived late to the online shopping party, but many are now working hard to catch up.  They should as the following chart from the Forrester Marketing Research firm shows online sales projections here through 2015:

If you have the stomach to put some money on the table with many of our retailers, follow their online presence and sales.  International Internet competition is a threat not just to sales, but to operating margins.  Recently the CEO of Woolworths blasted fellow major retailers here for whining about the GST tax.  His advice was to stop crying and get on with it.  CEO Grant O’Brien argued:

“In the last 18 months, we’ve heard a lot of complaining from many of my fellow retailers who seem terrified about the online monster lurking under their beds – costing them jobs, sales and profit margins. Much of the conversation has focused on the question of the GST threshold on imported goods. Yet, the savings available to consumers on many products can far outweigh the current GST threshold, making this point irrelevant.

Maybe the solution isn’t to fix the GST on imported goods; maybe the solution is to lower your prices to a point where the consumer can actually have some trust again. The last thing Australians need is retailers calling for more taxes. It’s nonsense.”

For retailers to thrive here they must get aggressive with a multi-channel strategy.  This is something any retail investor can track.  Premier Investments (PMV) provides an example.  This company started as a holding company investing in Australian businesses.  Their principal holding was the Coles Myer operation.  They divested both and in 2008 acquired retailer Just Group and its 7 product brands. 

While they are talking about store expansion, they still have only one brand – Peter Alexander – with a significant online presence.  Watch what they do going forward.  Their share price performance marks them as one of the many beaten down retailers.  Here is the chart:

The remaining companies in the table all have Price to Earnings Ratios under 10 and qualify as contrarian plays for investors with appetite for high risk.  The first is Billabong, a favorite target of short sellers for over a year. 

On 25 June 2012 Billabong hit an all time low of $0.92.  The company has been on a downward trajectory for years.  The problems range from strategic confusion over whether management wanted to remain a wholesaler and subsequent capital expenditures to move into direct retailing.  Previous management rejected a takeover bid in February 2012 for $3.30 per share, insisting the company was worth at least $4.00 per share.  The company is desperately seeking to reduce debt, selling off assets and announcing a capital raising shortly after claiming it didn’t need one.  Here is the sad story as played out in the share price over the last two years:

Why would any sane person consider investing in this dying dog of a company?  For three reasons – brand identification, new management, and takeover potential.  Billabong is an internationally recognised brand and the recent appointment of a new CEO should be enough to put this stock on your watch list.  Analysts are uniformly negative on BBG with one exception.  On 22 June 2012 RBS Australia maintained a BUY call on BBG although lowering the price target from $2.45 to $1.85.  The analyst there had a conversation with the new CEO and reported the company is ready for change.  Despite the massive dilution from the recent capital raise, this analyst thinks the stock is cheap and the new CEO will be able to right this sinking ship.  While that remains to be seen, it is hard to imagine how a company that attracted an offer price of $3.30 per share six months ago is now worthless.

Now let’s look at the last two retailers from our table, Myer Holdings and Metcash Limited.  Here is their dismal year over year share price chart;

Although Myer’s is our largest department store group and has brand identification dating back a century, it has only been a publicly traded entity since 2009.  They came to the share market under miserable conditions and in the eyes of at least two of our major brokerage firms are holding their own.  Both UBS and Credit Suisse have BUY and OUTPERFORM ratings based on valuation.  Although both see tough times ahead, if you believe things will get better, the stock is cheap.  With more than 60 stores already, they are planning another 15 new openings and are among the most aggressive of any of our major retailers at adopting a multi-channel strategy.  They established an innovative customer loyalty program which is providing critical information to further their online strategic stgelopment as well as insight into shifting customer buying behavior.  This is one to watch.

Finally, there is the ultimate contrarian play – Metcash Limited.  You can see from their chart above MTS was actually holding their own until market participants turned against them in dramatic fashion in response to a series of announcements. 

First they went out and bought 100% interest in Mitre 10 hardware brand and followed that with a capital raising many analysts think they didn’t need.  Then they announced an agreement to gobble up 75.1% of the Automotive Brands Group (ABG) for $53.8m.  ABG is in the automotive parts aftermarket sector supplying about 241 stores.  This will put MTS in competition with another company on the list, Super Retail Group.

Historically Metcash has been positioned as a wholesale distributor of groceries, fresh produce, liquor, and other “fast moving” consumer goods.  Although market analysts see them in the food business, company management apparently thinks of the company as a product distributor and they are busily buying up more product lines.  It seems they want to compete with the big boys at Woolies and Wesfarmers and push whatever they can through existing and new distribution channels.

Citi is the only major analyst clinging to a BUY recommendation, yet expressing concerns about management’s shifting focus to other industries while their core business of food distribution is floundering somewhat.  The BUY rating comes with the final very lukewarm comment – Buy call, price target, and forecasts are maintained, for now.  Time will tell.

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