Rampant discounting in retail is hardly new. Department stores and fashion chains have conditioned their customers to wait for larger, more frequent sales and rarely pay the full price.
Even so, the extent of discounting surprised me on a recent shopping trip. One fashion store after another advertised sales of up to 40 per cent off, instore and online. Sales offers bombarded my phone (the curse of signing up to customer databases) and some came by text.
Being a sceptical journalist, I assumed the sales were for a few items to encourage instore traffic or mostly for old summer stock that did not sell. Not so. Several adventurewear retailers offered 40 per cent off all company-branded items – the majority of their stock.
Even new-season stock was being heavily discounted, amid heightened competition in a slow sales-growth environment. I can’t recall so many retailers having “flash sales” so soon after Christmas and slashing their margins to move stock.
That says a lot about the challenges of the Australian economy and retail sector. And the danger of buying stock in mature companies that rely on domestic retail sales growth. Retailing conditions could go from bad to worse in 2019, tipping more firms into insolvency.
Yes, my experience with these sales is anecdotal. It can be dangerous extrapolating personal experiences to an entire sector. But your eyes and ears are always your best investment tool; it’s obvious that retail conditions are worsening.
The house-price correction, high household debt and stagnant wages growth are a terrible trifecta for retailers. Together, they suggest an extended period of consumer de-leveraging as more people become concerned about their falling wealth, so pay down debt and spend less.
De-leveraging is not a quick fix, particularly for those who bought property late in the cycle near the price peak. They are watching the value of their property fall, facing a mountain of debt and struggling with rising living costs as wages stay flat year after year.
Who would want to be a retailer in this environment? There are, of course, always exceptions. I have nominated electronics retailer JB Hi-Fi for The Bull several times over the years and it has not disappointed. Infant-goods retailer Baby Bunting Group impresses, as does kitchen-appliances manufacturer Breville Group.
I particularly like Australian retailers with an expanding global footprint. Those that can rapidly open stores in higher-growth markets overseas and boost their earnings firepower. Discretionary retailers that rely only on the slowing domestic retail market are hard to buy.
Premier Investments, owner of outstanding stationery chain Smiggle and key shareholder in Breville, has been a long-term favourite. The stock has a five-year annualised total return (assuming dividend reinvestment) of almost 20 per cent.
Smiggle is going gangbusters, its sales up 58 per cent over two years. Smiggle had 347 stores at the end of FY18 and could have more than 500 within a few years at its current growth trajectory. It would never have this type of growth only in Australia.
Premier has fallen from a 52-week high of $20.16 in September 2018 to $16.25, amid the fourth-quarter sharemarket sell-off and general retailing concerns. No company news warranted the extent of that fall and the stock has started to recover this month. Its rally can go further.
Chart 1: Premier InvestmentsSource: The Bull
Fast-fashion jewellery chain Lovisa Holdings is my other preferred Australian retailer with a global footprint. I first wrote about Lovisa for The Bull in 2015 when it traded at around $3. The stock peaked at $12.53 in mid-2018 and now trades at $9.73.
Like Premier, Lovisa was caught by broader selling in the stockmarket and retail sector. It was an easy stock to sell given the extent of its share-price gains in previous years. Also, like Premier, Lovisa has roared back to life this month and its rally has further to go.
Lovisa beat market expectations with its recently announced interim result for FY19, despite slightly negative same-store sales growth. The markets feared worse given the retail malaise and applauded management’s efforts, judging by the share-price reaction.
I rate Lovisa for two reasons. First, its cheap jewellery offering, aimed at young women, is less sensitive to economic conditions and online retailing. Teenagers seem to like visiting its stores to try on cheap earrings and other jewellery they might only wear a few times.
Second, the brand is expanding quickly overseas. International stores are now 58 per cent of Lovisa’s total store network and it has operations in Asia, Europe, the United Kingdom, the United States and the Middle East. Few small Australian retailers are as global.
Lovisa opened 40 stores in FY18; only four were in Australia. Importantly, Lovisa has the balance sheet to fund international growth and is aligning its management structures and product-sourcing to support a much larger global business.
Lovisa’s global sales momentum is offsetting challenging Australian conditions. And reinforcing that it pays to own retailers that have multiple growth engines offshore and are not relying only on an Australian market that is addicted to discounting and destroying brands and margins.
Chart 2: Lovisa HoldingsSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at February 26, 2019.