Three small-cap retailers, Dusk, Universal Store and Beacon Lighting, are capturing the attention of investors and analysts

The biggest names in the sector dominate the markets. But there are the small-cap businesses that analysts and investors say are the most promising on the exchange.

Universal Store chief executive Alice Barbery, in her store in Chermside on Friday, is rolling out different retail formats across the company. Picture: John Gass

Alice Barbery sets a cracking pace as she runs between her stores in Queensland and meticulously explains the growth story of her company, Universal Store, to institutional investors who are increasingly beating a path to her office.

On Friday it was no different, leading a tour of investors through a Universal Store at the Westfield shopping centre in Chermside, Brisbane, dealing with the roll out of a new format store called Perfect Stranger and checking on her house as northern Australia is blanketed with rains and floods.

Her workrate has certainly increased since Universal Store floated on the sharemarket in November 2020, when the nation – both shoppers and investors – were heavily distracted by the emerging global Covid-19 pandemic.

In the rush of Covid-19 news over the last two years, headline grabbing international affairs, shortages at the supermarkets, Universal Store has almost been forgotten. But in the background, Barbery has been working away to beat the drums about the retailer’s growth prospects.

“The value proposition that Universal Store discussed in the very beginning is still the value proposition and it is around lots of runway for growth for Universal Store and now Perfect Stranger, our new brand that we are just rolling out,” Barbery says.

“We‘ve got good store maturation that’s still occurring, we’ve got an online business that is still in its early stages and continuing to grow. We have an incredible opportunity with our private label that we are still growing and developing and we are getting better at direct sourcing.

“So there‘s more and more upside to the proposition … and we are getting lots of interest from new investors on a regular basis as well. So it’s a very positive growth story.”

Universal Store is one of a handful of small-cap retail hidden gems now starting to shine and getting the attention of institutional investors. Along with Universal Store – market capitalisation $320m – is candle and fragrances specialist retailer Dusk – $130m – and Beacon Lighting, $460m. Incidentally, Dusk also listed on the ASX in the middle of the pandemic, floating in November 2020, a few weeks before Universal Store. Beacon listed in 2014.

“I think the institutional investors are maybe getting a lit bit more confident in our ability to be able to deliver on executing our growth into trade (commercial lighting) and trade is a big part of Beacon Lighting and an area we have been investing a lot more in for the last few years and has been growing really well for us over that period,” Beacon Lighting chief executive Glen Robinson said.

“So I think they are starting to understand that definitely a lot better,” say Robinson, whose father Ian founded the retailer in 1975. “We are getting more traction with institutional investors, they have been comfortable with our stores and how we have been performing.”

However, the share price performance of these retail small-cap hidden gems has been mixed of late. In the last year Universal Store’s shares have fallen more than 40 per cent, Beacon Lighting is up 9.6 per cent and Dusk is down 37 per cent.

Aryan Norozi, an emerging companies analyst at Barrenjoey Capital Partners, tells The Weekend Australian that Dusk and Beacon were both large leaders in their categories.

Dusk has a market shares of around 20 per cent, while all three companies – Dusk, Beacon and Universal – have strong balance sheets and strong cash positions.

“In this environment you want to have a net cash position, especially for retailers. They are all cash generative, strong management teams, Norozi says.

“If you think about what is going on with rising interest rates, rising grocery prices and rising petrol prices the customer that is most going to be exposed is the customer who buys family grocery shop, drives their kids around and has a mortgage.

“Beacon is maybe a bit more exposed than the other two, Dusk and Universal, but their customers probably won’t feel it as much.”

These customers were typically younger, didn‘t have the expense of children or mortgages and were happy to shop.

In March candles and fragrance retail specialist Dusk announced it wouldn‘t proceed with the announced $28m purchase of candles and materials supplier Eroma Group, which Norozi says is good news for the small-cap.

“While this (cancelled deal) results in 4–6 per cent earnings per share downgrades and an around 5 per cent cut to our valuation, the Eroma acquisition was not core to our initial investment thesis,” Norozi says.

“We believe termination of the deal could drive potential for accelerated International expansion, we believe the market will ascribe offshore expansion a higher multiple relative to Eroma.” He retains an “overweight” rating on the company.

Norozi also rates Universal Store as an “overweight”, with its strong balance sheet and some $19m in cash positioning the company for growth opportunity around the further roll out of its Perfect Stranger retail format.

“When investors get to Brisbane one of the things we like to do is show them and walk them through our Universal Store and then one of our currently two so far purpose built Perfect Stranger stores … and they can see the real difference in those two brands,” Barbery says.

“So that‘s really fun and the shopfloor is where the magic happens anyway and that helps people understand what your relationship with your team is like, what your relationship with your suppliers is like and it’s a wonderful experience to take investors through the stores.”