The discretionary retail space is bound to divide opinions. Whether it’s talk about online – the $1000 GST exemption threshold applying to overseas goods bought online – or the future of bricks and mortar, retail makes for passionate debate.
From an investment perspective, Carey Smith, of Alto Capital, says discretionary retailers have struggled since the GFC.
It’s hardly new news, he says. But Smith says smart investors tend to find opportunities in challenging sectors – they think about longer term gains if stocks appear cheap. Smith says discretionary retailers are poised to do well when consumer confidence returns.
“People will spend again, it’s just a matter of when,” he says. “An improving property market in Sydney and Melbourne is a good sign for discretionary retailers.”
Today, leading analysts discuss stocks they believe are worthy of investor attention.
RCG Corporation (RCG)
James Samson, of Lincoln Indicators, says any discretionary retailer able to maintain earnings momentum during the GFC is a quality firm. Since then, Samson says this shoe retailer has been a consistent performer and remains a preferred income stock.
It owns Merrell and The Athlete’s Foot and Samson says the company is in strong financial health.
“We continue to believe RCG can produce growth in a tough environment, as the company focuses on expanding via new store roll-outs and further vertical integration,” he says. “Cash flow and the balance sheet remain strong and will support future dividends.”
Samson says the recent trading update suggested a 10 per cent increase in earnings per share going forward. “While the Christmas period isn’t necessarily crucial for RCG, January’s back-to-school sales period is a big contributor for the firm,” he says.
Super Retail Group (SUL)
Brands include Super Cheap Auto, Ray’s Outdoors, BCF and, more recently, Rebel. The company has about 585 stores and sales exceed $2 billion a year. This year, the company expects to open five new stores in the auto retailing division and another 10 in leisure and sports retailing.
Samson says the sheer size of the group appeals for its diverse revenue streams and it will benefit from any improvement in the economy. What also appeals is its exposure to sport and leisure as people strive to lead healthier lifestyles. He says the Christmas trading period is a bonus for a group that’s a relatively consistent performer year-on-year. “The company continues to invest in retail and management systems, while developing its multi-channel capabilities,” he says. “It’s well positioned to grow profits.”
The Reject Shop (TRS)
Senior analyst Janine Cox, of Wealth Within, examines the technical aspects of discount variety retailer, The Reject Shop. She says it survived the GFC relatively well, with the share price falling about 40 per cent from its all-time high, while the broader market fell 55 per cent. The stock recovered quickly to eclipse pre-GFC highs in early 2010, while the overall market struggled to retain more than 50 per cent of its fall.
From there, TRS continued higher to $18.86 before correcting sharply to test the 2008 low of $8.98 in 2011 and again in 2012. Since then, TRS has rebounded to demonstrate how the 2008 level is a strong base for a long term rise. Although a better time to buy TRS was when it broke resistance at $14, the stock has the potential to trade between $20 and $21 over the medium term. To tip the scales in favour of this happening, TRS must close any week above $18.10. Note a fall below $16.45 indicates it’s more likely to head to $14.50 first before recovering.
The shares were trading at $17.11 on November 21.
Pacific Brands (PBG)
The company’s brands are among the best known in Australia – Bonds, Hard Yakka, Sheridan, King Gee, Tontine and Hush Puppies. Despite its stable, the company has struggled in a fiercely competitive segment. Carey Smith says: “While the past two-to-three years have proven challenging, PBG is making progress and is about half way through its five-year restructuring process.
“While we are forecasting a 10 per cent decline in underlying profit for 2014, we believe the company offers good long-term value. Net debt has been reduced from $420 million to a very manageable $160 million in the past three years. Return on equity, in the past three years, has risen from 6 per cent to above 10 per cent and interest cover has improved from 3.5 times to 5 times earnings before interest and tax. It paid $122 million in fully franked dividends in the past three years.”
Smith says the company was recently trading on a price/earnings ratio below 10 times and a fully franked dividend yield above 6.5 per cent. “The much improved balance sheet and fairly consistent cash flows should enable the company to retain its current dividend payout ratio at 60 per cent of underlying earnings per share,” he says.
Peter Moran, of Wilson HTM, says the share price of this fashion icon has halved from its 2011 peak, with much of the weakness following the loss of the Ralph Lauren licence last year. He says Ralph Lauren had accounted for about 35 per cent net profit after tax – the negative impact is now largely factored into the share price.
But Moran says he sees potential for substantial upside following the recent signing of distribution agreements with GAP and Brooks Brothers, including their online businesses. “Additionally, we expect the growing Asian business to move closer to breakeven with profitability being achieved in 2015,” he says.
Moran says Oroton has recently been trading on a current year price/earnings multiple of 28 times, but he expects it to fall to 17 times for 2014 and 13 times by 2015.
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