The retail riddle

Published in the Herald Sun - September 2014 by Karina Barrymore

The retail sector has taken a battering in recent years as technology changes our spending habits and economic uncertainty hits our wallets.

However, there are still good pickings for share market investors if they know where to look, analysts say.

Consumer spending is starting to improve again but not across the board.

In recent weeks we have seen some of the best and worst of the retail sector with chain store owner Premier Investments and luxury brand retailer Oroton both turning out surprisingly strong results this week.

In contrast, department store group Myer continues to feel the brunt of ongoing hard times with a 23 per cent profit slump over the past year.

But now is the perfect time for investors to be casing which retailers to invest in, according to Wealth Within analyst Dale Gillham. The annual shopping season which stretches from October to January is about to hit.

"This festive season allows retailers to generate around 50 per cent of their revenue for the year and as a result this is when we often see retail stocks rising nicely," Mr Gillham said yesterday.

"Therefore, now is the time to be looking. I suggest investors select retailers they know and shop with. Because if they are shopping there, chances are everyone else is."

Changes in trends and technology could also significantly affect retailers, such as at JB HiFi, which had a profit rise with each new Xbox release or when the latest technology or big TV hit the market, he said.

"Even the new iPhone release will see retailers get a profit boost as shoppers will not just buy the iPhone 6 but will buy accessories to go with it," Mr Gillham said. Wealth Within recommends a mix of larger and smaller retailers, especially targeting ones that are paying dividends at a return of about 4.5 per cent of the share price.

According to Morningstar Equity Research, the retail sector remains vulnerable but the key for investors is to look for companies with a combination of a competitive edge and strong management.

"Retailers suffer from low barriers to entry, increasingly commoditised products, easily replicable business models and few switching costs competitive advantages are often fleeting," Morningstar analyst Daniel Mueller said.

Cheap prices and generic products are not a competitive edge, Mr Mueller said, as the retailers starting to dominate were those that had developed a niche customer base, built on quality and brand preference.

Known as an "economic moat" these competitive advantages provide a protection from the wider market and an edge over the competition.

Examples include major retail groups such as Wesfarmers and Woolworths with their big buying power but, for almost every other retailer, the economic moat will be based on intangibles such as quality, brand awareness, technology or design.

"Moat-worthy Australian consumer companies tend to be niche brand developers and distributors," Mr Mueller said.

The other driving force for a successful retail company is management or the wider term known as stewardship, which includes governance and where and how shareholder capital is used.

"In retail, the lack of 'moats' means that strong stewardship can make an immense difference to the fate of a company," Mr Mueller said.

"Any slight mismanagement can lead to a material impact on the bottom line.

"When it comes to retail, good management can be the difference between success and insolvency."

Examples of Australian retailers with good stewardship included Wesfarmers, Breville, Domino's Pizza, Super Retail and Premier Investments, Mr Mueller said.

However, of these companies, not all were a buy or hold recommendation, including Premier and Domino's, because their shares were currently over priced, he said.

UBS analyst Ben Gilbert, who quickly slapped a "sell"

recommendation on Myer shares after last week's poor result, currently recommends Harvey Norman, Flight Centre and Super Retail Group.

Continued strength in the housing sector was expected to flow through to Harvey Norman's sales of household goods and related products, Mr Gilbert said.

The sports and leisure company Super Retail Group was a "compelling investment" with strong management and a proven track record, he said.

IG Markets analyst Evan Lucas also suggests investors watched the Australian currency as a forward indicator of retail profits.

"As the dollar falls, the cost of imported goods will increase that makes me nervous for companies such as Harvey Norman, JB HiFi and Dick Smith," Mr Lucas said.