Retail stock bargains to bag this year
Retailers face an uncertain 2023 as high interest rates and soaring energy bills rein in spending, but some are primed for growth.
The nation’s $400bn retail sector may be entering 2023 with bloated cash registers after a Christmas spending binge and Boxing Day sales, but there is growing unease about what the year ahead will bring.
The cumulative impact of interest rate rises since May – and an expected hike by the Reserve Bank in February – higher household energy bills, back-to-school costs and other pressures on consumer budgets are expected to rein in spending over the next 12 months.
A post-Christmas sales splurge of almost $24bn is being viewed by many economists and analysts as a last hurrah by shoppers rather than an indication of spending habits for 2023.
For some retailers the best of times will be behind them as tougher economic conditions decimate earnings and pull down any strong growth trajectory they might have enjoyed in 2022.
But for others will perform strongly despite the economic outlook as they leverage a strong Christmas to re-engage with consumers and cement their position as key retail destinations for shoppers.
“Christmas is the most important time of the year for almost every retailer in Australia. December, and now, thanks to Black Friday and Cyber Monday, November, are pivotal months for the sector,” wrote Morgans broker Alexander Mees in a note to clients.
“They can make or break a retailer’s performance for the year. The annual exchange of Christmas gifts represents a great opportunity for retailers to supercharge their growth, or rescue a flagging sales line. It’s often the time that new products are launched onto the market.”
This year, Morgans has picked out lighting retailer Beacon Lighting, Super Retail Group – the owner of Supercheap Auto, BCF, Rebel and Macpac – and clothing chain Universal Store as top retail stocks.
“We think retail demand for Beacon Lighting’s lighting products will remain resilient through the first half of 2023 and into the second half, but even when consumer demand inevitably softens, we believe its strategy to develop its trade and international business will offset and outweigh the cyclical downturn,” Mr Mees wrote.
“This long-anticipated decline in consumer demand for lighting products does not appear to have yet eventuated, with sales growth described as ‘encouraging’ at the AGM and web traffic holding up at the same levels seen during Covid.”
Like many small caps, Beacon Lighting had a tough year on the market in 2022 as its shares slid more than 26 per cent despite posting record sales and profits as its burgeoning business in the US gathered pace and recent push into the trade sector generated rising returns.
According to Morgans, Beacon Lighting is trading on a price to earnings ratio for fiscal 2024 of just 13 times.
“We think Beacon Lighting is too cheap for the growth it offers over the longer term.
“We believe Beacon Lighting’s growth pillars, notably trade and international, will outweigh the pressures of an easing of retail demand, in the face of rising interest rates and falling property prices, to deliver higher sales in fiscal 2023.”
Though not a growth story as such, Mr Mees sees Super Retail as a well-run retailer that is well placed to surprise positively on earnings.
“Consumer demand is holding up well across most of its brands, while its investment in inventory is likely to allow it to hold gross margins. Super Retail has more than $250m in franking credits and we wouldn’t be surprised to see a special dividend at some point.”
Shares in Super Retail ended 2022 down 15 per cent for the year, falling to $10.71.
“Universal Store is benefiting from robust demand from its youthful and fully employed core customer,” said Mr Mees.
“It has displayed excellent discipline around pricing and it has attractive growth opportunities across three channels: retail, online and now wholesale too.
“Our positive view on Universal Store is predicated on the opinion that it is a well-managed business with opportunities to grow through multiple avenues.
“We believe Universal Store’s youthful core customer is likely to be more resilient and we expect Universal Store to deliver growth in fiscal 2023 and fiscal 2024.”
Morgans has a forecast fiscal 2024 price-earnings ratio of 10.4, with a dividend yield of 7.1 per cent.
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