Tim Boreham: Topsy turvy market enough to make you a basket case

In a consistently inconsistent ASX small-cap discretionary retail sector, life is difficult for investors hoping to snag a bargain, says Tim Boreham.

Inconsistency makes deciding what stocks to put in your basket quite challenging. Picture: Thinkstock

The sprawling ASX small-cap discretionary retail sector faces a nervous lead-up to Christmas amid wilting consumer confidence – including the outcome of the current Black Friday/Cyber Monday spend-fest.

This AGM season the retailers conveyed a consistent message of soft sales in the first stanza of the current financial year, albeit with the numbers holding up OK relative to pre-pandemic levels.

In the meantime, inflation has impacted both the cost of doing business and shoppers’ proclivity to spend.

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As with any downturn, the seminal question is whether share valuations have already taken care of the downside – and perhaps a little bit more.

Broker RBC notes the recent August results season was “better than feared” for the discretionary retailers, with earnings exceeding expectations.

“Whilst sector growth and valuation multiples appear challenging in (the current financial year), we believe investors may look through near-term pressures to improved trading conditions in 2024-25 and beyond,” the firm opines.

Across the sector, share performance has been consistently inconsistent.

For instance, Super Retail Group (ASX:SUL) shares have surged by about one-third over the last year.

In the first 16 weeks of the current financial year, the group’s like-for-like sales edged up 2 per cent. Evidently shoppers are swapping the great outdoors for chamois and polish: its Super Cheap Auto chain posted a 4 per cent sales increase, but Macpac divisional turnover declined 8 per cent.

Nick Scali (ASX:NCK) shares are 12 per cent stronger than a year ago, despite plunging close to 10 per cent on Thursday after CEO and major holder Anthony Scali peeled off a $50 million chunk of his holdings.

The veteran furniture purveyor posted a robust 35 per cent surge in net profit for the year to June 30, to $101 million.

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But September sales were 6.7 per cent off the pace, with store traffic down 10-15 per cent.

A quirk of this retailer is that January – not pre-Christmas – is its key trading month, as many furloughed folk flock to sofa showrooms rather than sand and surf.

The owner of The Athletes Foot chain, Accent Group (ASX:AX1), had a stellar 2022-23 year, duly reflected in a 24 per cent share surge.

The shoe was on the other foot after the company’s November 17 update, when investors reacted poorly to a seemingly innocuous update of a 2 per cent like-for-like sales decline in the first 19 weeks of the current financial year.

On the laggard side, the plus-sized apparel group City Chic Collective (ASX:CCX) has lost around 70 per cent of its value over the past year.

At this week’s AGM, chairman Michael Kay dubbed the performance as “utterly unacceptable” – and we can’t argue with that.

Management also reported the company had “right sized” inventory wise and had achieved higher-than-budgeted cost savings – enough good news to prompt a 23 per cent share rebound.

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The owner of Bevilles and its eponymous jewellery chain brand, Michael Hill International (ASX:MHJ) managed 2 per cent growth for the first 19 weeks of the year.

This number compares cheap-and-cheerful fast fashion trinket house Lovisa (ASX:LOV), which saw like-for-like sales decline by 6 per cent (albeit with overall growth of 17 per cent with the addition of 14 stores).

The outperformance of High Street jewellery over fast fashion highlights the danger of generalisations about consumer behaviour in adverse conditions.

For our tuppence worth – your columnist’s disposable income these days – we suggest appraising the retailers on a case-by-case basis, rather than the misleading “cost of living crisis” narrative.

Look no further than high-end online fashion house Cettire (ASX:CTT), which reported a 92 per cent surge in September quarter sales to $127 million.

Cettire’s stellar sales showing has torpedoed the quaint notion of us being ‘all in this together’ in adverse times.

That said, 90 per cent of Cettire’s sales were derived from offshore – well beyond Australia’s groaning mortgage belt.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

Find more Tim Boreham goodness at stockhead.com.au

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Originally published as Tim Boreham: Topsy turvy market enough to make you a basket case